Watts Water Technologies, Inc. Annual Report 2013
Improving comfort, safety, quality of life
Our Mission:
Our Mission
To improve comfort, safety,
and quality of life for
people around the world
through our expertise in a wide
range of water technologies.
To be the best in the eyes of
our associates, customers, and
shareholders.
Improving comfort, safety, quality of life
Our Mission:
To improve comfort, safety,
and quality of life for
people around the world
through our expertise in a wide
range of water technologies.
To be the best in the eyes of
our associates, customers, and
shareholders.
From a 19th century machine shop in Lawrence,
a family of companies, has grown into a leading
Massachusetts, Watts Water Technologies, through
worldwide manufacturer, providing innovative products
and solutions for the safe and efficient use of water.
We offer products and solutions to improve comfort,
safety, and quality of life—primarily through the use of
water. We serve customers in the Americas, EMEA, and
Asia Pacific and provide one of the broadest plumbing,
heating, and water quality product lines available any-
where in the world.
selling more of our products to our existing customers,
and introducing our products into new markets around
the world. We also grow through strategic acquisitions
and have acquired 36 companies globally since 1999.
• Operational Excellence—through continuous im-
provement activities and footprint optimization. Our
Continuous Improvement Operating System (CIOS),
implemented at our facilities worldwide, is enabling
us to improve in key metrics related to safety, quality,
delivery, productivity, and working capital.
Our companies offer solutions for plumbing and flow
control, water quality and conditioning, drainage and wa-
ter reuse, and HVAC for residential and commercial build-
• “One Watts Water”—by operating as a unified or-
ganization with a shared business culture and pur-
suing
leverage points
throughout our business.
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ings and for applications including municipal waterworks.
Increasingly, we are leveraging products and capabilities
Our brands include many category leaders, such as our
from one part of our business to enable other parts to
flagship Watts brand of water safety and flow control
grow and improve.
products in the United States, BLÜCHER stainless steel
drains in Europe, and Socla valves and flow control solu-
We see tremendous opportunities for our products
tions in Europe and Asia.
and systems to meet the need for clean, safe water and
sanitation in both developed and emerging markets. We
We focus on a three-part corporate strategy for creating
are dedicated to help meet those needs and more—
shareholder value:
empowered by our corporate strategy, our expanded
global leadership team, our drive for innovation and
• Growth—by developing new products and system so-
continuous improvement, and our many skilled associ-
lutions and leveraging existing products in new ways, by
ates around the world.
Watts Water Technologies Executive
Management Team: Left to right:
Robert Allsop, Vice President of
Operational Excellence
Total Net Sales
Dean P. Freeman, Chief Executive
Officer, President, and Chief Financial
1,407.4
Officer
$1500
1,427.4
Ram Ramakrishnan, Executive Vice
President, Strategy and Business
Development
$1200
Kenneth R. Lepage, General Counsel,
Executive Vice President of Human
Resources, and Secretary
$900
$600
$300
$0
s
n
o
i
l
l
i
M
Total Net Sales
Free Cash Flow
Free Cash Flow
$1500
1,473.5
$1200
1,407.4
1,427.4
1,473.5
$200
$150
$200
250%
$150
200%
$900
$600
$300
$0
s
n
o
i
l
l
i
M
$100
104.4
103.0
$100
92.1
151.2%
104.4
103.0
150%
92.1
151.2%
135.2%
$50
$0
146.3%
$50
146.3%
135.2%
e
m
o
c
n
I
t
e
N
f
o
%
$0
100%
s
n
o
i
l
l
i
M
s
n
o
i
l
l
i
M
250%
200%
150%
100%
e
m
o
c
n
I
t
e
N
f
o
%
2011
2012
2013
2011
2012
2013
2011
2012
2013
2011
2012
2013
The numbers in the above charts reflect the sale of
Austroflex on August 1, 2013. Austroflex's results of
operations have been presented as discontinued
operations for all periods presented.
For further discussion of “free cash flow,” “free cash flow conver-
sion rate” and “net debt to capitalization ratio,” which are non-
GAAP financial measures, and the comparable GAAP measures,
see the section titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Form 10-K
included in this Annual Report to Shareholders.
To Our Shareholders
In 2013
we continued to build on the
strength of our global presence,
our significant breadth of products and systems, and our
leadership position in the industry. We delivered solid
top line performance, achieving record worldwide sales.
During 2013, we started to see an acceleration of
growth in the Americas and the beginning of our partic-
ipation in that growth cycle. We made significant prog-
ress in our Lead Free conversion program, successfully
transitioning both our manufacturing processes and
our customers’ product requirements. We grew sales or-
ganically for the full year as we participated in a growing
residential construction market and a solid repair and
replace end market, and as sales of Lead Free products
took hold in the market place in the second half of 2013.
In EMEA we saw our end markets decline during 2013
due to macroeconomic forces. Our continued focus on
Operational Excellence enabled us to control costs and
drive productivity despite the downturn.
Asia Pacific remained an area of strong performance,
with our team building the foundations for a growth
platform based on our global plumbing and HVAC ca-
pabilities. The Asia Pacific team grew sales organically
by 20.5 percent in 2013 on top of an 18 percent sales
increase in 2012.
2013 FINANCIAL HIGHLIGHTS
Consolidated revenues increased by 3.2 percent dur-
ing 2013, or $46.1 million, to $1.47 billion. The increase
consisted of the following:
Organic
Acquisitions
Foreign Exchange
(in millions)
$30.6
$ 0.7
$14.8
% change
2.1%
0.1%
1.0%
Total increase in net sales $46.1
3.2%
Free cash flow for 2013 was $92.1 million, which rep-
resents a free cash flow conversion rate of 151.2 percent
of net income from continuing operations. This was
the sixth consecutive year in which our free cash flow
exceeded net income. Cash on hand at December 31,
2013, was $267.9 million. We believe this performance,
coupled with our conservative capital structure, posi-
tions us well as we move into 2014.
At December 31, 2013, our net debt to capitalization
ratio was 3.8 percent, compared to 10.8 percent at De-
cember 31, 2012.
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Current portion of long-term debt
Plus: Long-term debt,
net of current portion
Less: Cash and cash equivalents
Net debt
Net debt
Plus: Total stockholders’ equity
Capitalization
December 31,
2013
(in millions)
$2.2
305.5
(267.9)
$39.8
$39.8
1,002.1
$1,041.9
Net Debt to Capitalization Ratio 3.8%
Stock Price
$61.87
$42.99
$34.21
70
60
50
40
30
20
10
0
e
r
a
h
s
r
e
p
$
12/30/11
12/31/12
12/31/13
Above are closing prices on the dates indicated.
The June 2013 opening of our Lead Free foundry in Franklin, NH, was a great event for our
Company, our employees, and our industry. The opening of this state-of-the-art facility positions
our Company as "Leading the Way to Lead Free." The opening was attending by more than 500
people, including New Hampshire Governor Maggie Hassan (top photo, center) and other local
dignitaries, plant employees, and members of the press.
LEADERSHIP DEVELOPMENTS
In 2013, we strengthened our leadership team by
adding two highly-experienced regional leaders and
bringing on board our first strategy and business devel-
opment executive.
In June, we announced the promotion of Mario San-
chez to President and Group Managing Director, EMEA.
Mario has more than 20 years of global management
experience in multiple industries with companies such
as Johnson Controls, Inc., Tyco International, Ltd., and
Ingersoll-Rand. He succeeded J. Dennis Cawte, who
retired after more than 11 years with Watts Water. Ma-
rio had been Vice President of Plumbing and Heating,
EMEA prior to his promotion.
In August, Suellen Torregrosa joined Watts Water as
President, Americas. Suellen has more than 20 years of
experience in business leadership roles, most recently
as president of Milton Roy Company, a global manufac-
turer of controlled
volume (metering)
pumps and related
equipment. Earlier
she worked for sev-
eral business units
of United Technolo-
gies Corporation.
Suellen Torregrosa
President,
Americas
In October, Ram Ramakrishnan joined our Company
as Executive Vice President, Strategy and Business De-
velopment. Previously, Ram was Vice President of New
Growth Platforms for Avery Dennison Corporation. Prior
to Avery Dennison, he was head of Strategy and Cor-
porate Development at Millipore Corporation. Ram has
considerable experience in our industry and is help-
ing us create a more structured focus on acquisitions
around the world.
In early 2014, Dean Freeman was appointed interim
President and Chief Executive Officer of Watts Water
after David Coghlan resigned in January 2014 to pur-
sue another career opportunity. We thank David for his
service, during which he drove our current strategic
direction. Dean will continue to drive our corporate
strategy, which he has helped develop since his arrival
in October 2012.
TRANSFORMATION
EMEA
Last year, we launched a business transformation in
EMEA to refocus the organization on serving the pan-
European region, rather than individual countries. We
have implemented
this change in re-
sponse to the dif-
ficult
economic
climate in Europe,
realizing that our
future success de-
pends on
lever-
aging the capability of Watts Water on a regional basis.
Through this change, we are better positioning ourselves
for growth when the European economy turns around.
Mario Sanchez
President and Group
Managing Director,
EMEA
As part of the EMEA business transformation, we cre-
ated three Strategic Business Units in EMEA: Water &
Plumbing; Drains; and Heating, Ventilation, and Air Con-
ditioning. Leaders of the new business units have been
charged with developing and implementing strategic ini-
tiatives that will differentiate our products in the market
and drive customer satisfaction, growth, operational ex-
cellence, and financial performance. We believe this new
operating model is more flexible and will enable us to
leverage our “One Watts Water” capabilities across EMEA.
Also, as part of our Operational Excellence efforts, dur-
ing 2013 we closed two manufacturing facilities, one
engineering center, and two sales offices and reduced
our headcount in the region by approximately five percent.
The Americas
In 2013, we continued our multi-year transformation
towards operating as “One Watts Water” in the Americas.
We have made great strides, moving from individual
companies selling individual product lines to a unified
approach—presenting customers with all of our brands
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Top: Watts TRITONTM pipe fusion system
Bottom left to right: tekmar Snow Melting Control 654;
Orion PolystarTM pipe and fittings; Watts differential pressure
balancing valve.
and providing complete system solutions.
In 2013, through One Watts Water, we continued to
take advantage of opportunities in the U.S. as the resi-
dential market recovered. To share in that recovery, we
approached national and regional homebuilders and
contractors and presented bundles of our full offering of
products. We had considerable success in adding new
accounts throughout the year.
Also during the year, we worked to serve our channels
in new ways. For example, we opened state-of-the-art,
interactive Water Quality Dealer Showrooms and Dis-
tribution Centers in Twinsburg, Ohio, and Moorestown,
New Jersey, to serve our water quality dealer channel.
These full-service facilities display a range of water qual-
ity treatment solutions designed for residential & com-
mercial use and serve as distribution centers for their
surrounding regions.
INNOVATION
Lead Free
Of all of our priorities last year, our highest was the
transition to Lead Free in advance of the January 2014
implementation of the “Reduction of Lead in Drinking
Water Act” in the United States. During 2013, customers
not previously impacted by state Lead Free laws began
transitioning to Lead Free products, and we worked to
make sure we were ready to meet their need for Lead
Free products. While many of our products already satis-
fied the requirements of the new Lead Free law, we tran-
sitioned thousands of additional products to Lead Free
during the course of the year.
On June 21, we commissioned our new state-of-the-
art Lead Free foundry in Franklin, New Hampshire. This
innovative 30,000+ square foot foundry is enabling us
to produce Lead Free versions of products already pro-
duced in Franklin, as well as additional products brought
back from overseas.
By building this separate Lead Free foundry, we
have positioned ourselves to be the preferred choice
for Lead Free products. Having a dedicated Lead Free
foundry helps us eliminate the possibility of cross
contamination of materials and provide efficient and
timely availability of Lead Free products. We believe
we are the only company to invest in a completely
new, dedicated Lead Free foundry.
Innovative Products
control
We introduced a range of innovative products dur-
ing 2013. For example, the Boiler Control 284 from tek-
mar, introduced in
is
February 2013,
tekmar’s first boiler
plant
to
communicate with
commercial build-
ing automation sys-
tems. It has the flex-
ibility to control different types of boilers to help reduce
capital costs and ensure greater efficiency.
Elie Melhem
President,
Asia Pacific
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In June, tekmar also introduced the Snow Melting
Control 654, designed to operate hydronic or electric
equipment for melting snow or ice on any surface. The
Snow Melting Control 654 offers the benefits of system
communication, including remote accessibility. The con-
trol maximizes energy efficiency through an automatic
start and stop system, and uses snow and ice sensors to
detect snowfall.
Also in June, we formally introduced our new Poly-
star™ line of polypropylene pressure piping systems
from Orion. Polystar systems are intended to be used in
a variety of water applications, such as hydronic heating,
water cooling, and water chilling. Polystar uses cutting-
edge materials to offer a high-quality piping solution
that is resistant to chemicals and corrosion and resists
thermal expansion.
In July, we introduced a new differential pressure bal-
ancing valve in Asia Pacific, a top-of-the-line balancing
valve that we believe exceeds other competitive of-
ferings currently in the market with regards to energy
savings, ease of use, and quality. It was introduced to
meet the demands of Chinese customers for enhanced
energy savings.
Clockwise from top left: Watts OneFlow® anti-scale system and Watts reverse
osmosis water filtration unit; SmartTracTM radiant panel solution from Watts Radiant;
Watts Dead Level TM trench drain installation.
In September, we introduced the TRITON™ pipe fusion
system. TRITON is the first application of radio frequency
electromagnetic technology for joining plastic piping.
This new welding technique enables pipe joining in min-
utes and creates a safer work environment by eliminating
exposed heating elements, adhesives, and exposed flame.
Through these and other new product introductions,
we are expanding our breadth of product offerings with
the goal of contributing to our organic growth.
FOCUS
Emerging Markets
Studies indicate that over the next decade significant
growth is expected to occur in developing markets. With
this in mind, in 2013 we continued to build our presence
in the key emerging markets of Asia Pacific, Eastern Eu-
rope, and the Middle East.
In Asia Pacific our sales into residential and commercial
plumbing and heating markets increased by 16 percent
in 2013. China, once known primarily for low-cost manu-
facturing, is now home to a growing consumer market.
We focused on the central and eastern regions of China,
home to the majority of the Chinese population. We also
expanded our sales efforts into less-well-known, but rap-
idly growing cities in western China.
In China, a majority of the growth we have experienced
has involved marketing and selling our products from
Europe and North America, including heating products
from Germany and Italy, valves from France, and strainers
from the United States. For example, by promoting our
European products for the heating market in China, our
Retail Channel sales increased in China by $2.3 million
in 2013.
Our OEM strategy is to focus on product standard-
ization and expansion of OEM partners. We work with
major international OEMs, and we recently established
relationships with key Chinese OEMs, such as one of
the largest kitchen sink and appliance manufacturers in
China. In addition, for a key water heater OEM, we have
developed a pressure reducing valve designed for the
Chinese market.
In 2013, we also made some important changes to
meet customer needs. By introducing an adjustable
pressure differential valve in northern and eastern China,
our total valve sales increased by more than 30 percent
in these two regions. In addition, we leveraged the extru-
sion capabilities at our WPT facility in Zhejiang, China, to
extrude single layer PERT piping for the booming heat-
ing market in northern China.
Our sales in Asia Pacific outside of China also increased
significantly during 2013. In Australia and New Zealand,
we restructured our distribution and signed on a key dis-
tributor to represent us in both countries. As a result, our
sales increased by 52 percent in Australia in 2013.
Also in 2013, the Eastern European market presented
a growing opportunity for our HVAC, Water & Plumb-
ing, and Drains businesses—with sales up by more than
four percent by year end across the territory (with strong
growth in Hungary and Romania). In addition, we con-
tinued to focus on the Middle East, where many of the
products we supply are used for drainage, new building
construction, and industrial applications.
Our One Watts Water strategy is supporting our
growth in these emerging markets. In Eastern Europe,
many of the products sold are manufactured in our
factories in Western Europe. In the Middle East, all the
products we sell are imported from Europe and North
America due to our strong brand names there. Our busi-
ness in the Middle East is truly a “One Watts Water” story.
Continuous Improvement
During 2013, we also continued to focus on Continu-
ous Improvement and our Continuous Improvement
Operating System (CIOS) to achieve best-in-class perfor-
mance in our factories and key business processes.
In 2013, we saw rapid growth in the number of our as-
sociates skilled in using a broad range of CIOS tools and
a doubling of the number of people being certified as
kaizen tool champions. The number of kaizen events also
remained strong, with an increasing number of “just-do-
it” events. Such events involve skilled people using CIOS
tools, who engage in immediate and less structured
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problem solving. Over all, we continued to work to im-
prove on our “Five True North” metrics of safety, quality,
delivery, productivity, and working capital.
COMMITMENT
Supporting Sustainability
In 2013, we continued to work on initiatives to sup-
port sustainability. In March, Mueller Steam Specialty in
St. Pauls, North Carolina, became the first Watts Water
manufacturing facility in North America to achieve ISO
14001 registration of their environmental management
system.
ISO 14001 is an internationally recognized standard for
environmental management, and is used by organiza-
tions wishing to demonstrate a commitment to identi-
fying and reducing the impact of their activities on the
environment.
During the year, we also sponsored our second Annual
Sustainability Awards, which recognized sustainability
programs within all our regions. Among them was an en-
ergy saving project at our BLÜCHER facility in Denmark,
which through a new ventilation system reduced energy
consumption by 30 percent and emission of CO2 by 148
tons per year.
We also recognized our Watts Water Quality group’s
OneFlow® anti-scale system, which is a sustainable green
product with associated LEED rating benefits that in-
clude floor space reduction, no chemical introduction,
and reduction in wastewater generation, thereby allow-
ing greater water efficiencies and reduced electrical con-
sumption.
LOOKING AHEAD
Last year was a transitional year for us with new mem-
bers of our leadership team, important changes in EMEA,
and the Lead Free transition in the United States. In 2014,
we see exciting growth opportunities in all regions. We
intend to continue to maintain and enhance our estab-
lished position in developed markets, while increasing
our focus on key emerging markets.
For Continuous Improvement, in 2014 we expect to
place greater focus on the enterprise value stream, link-
ing all the steps in the production process, from working
with raw material suppliers through to supplying finished
products to customers.
Also in 2014, as part of “One Watts Water,” we plan to
further develop our key supply chain process with the
introduction of an Integrated Business Planning process
in the Americas and broader use of the process in EMEA.
It will further enable us to have the right products at the
right place at the right time to satisfy our customers. In
addition, we plan to continue to develop capabilities and
processes in our sourcing activities and accelerate the de-
ployment of CIOS into our offices to improve work and
processes there, as well.
Finally, we cannot close this Letter without acknowl-
edging David Coghlan, our former President and Chief
Executive Officer, who left the Company in January 2014.
Since coming to Watts Water in 2008, he helped success-
fully lead the Company through some very tough eco-
nomic times. As Chief Executive Officer, he developed
our strong leadership team and helped to conceive and
drive our current corporate strategy. We are grateful for
his leadership and wish him all the best in his new en-
deavors.
Looking ahead, our aim is to maintain and enhance our
leadership position as a global company providing prod-
ucts and systems that support comfort, safety, and qual-
ity of life for people all around the world. In 2014, we in-
tend to continue our drive to satisfy our customers, build
on our strengths as One Watts Water, and keep working
to become the global leader in our industry.
Chief Executive Officer, President, and
Chief Financial Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Or
(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-11499
WATTS WATER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
815 Chestnut Street, North Andover, MA
(Address of Principal Executive Offices)
04-2916536
(I.R.S. Employer
Identification No.)
01845
(Zip Code)
Registrant’s telephone number, including area code: (978) 688-1811
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class A common stock, par value $0.10 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:2)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a
smaller reporting company)
Smaller reporting company (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:3) No (cid:2)
As of June 28, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was approximately $1,293,553,373 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at January 31, 2014
Class A common stock, $0.10 par value per share
Class B common stock, $0.10 par value per share
28,734,210 shares
6,489,290 shares
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 14, 2014, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1. BUSINESS.
PART I
This Annual Report on Form 10-K contains statements that are not historical facts and are considered
forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements contain projections of our future results of operations or our financial position or state
other forward-looking information. In some cases you can identify these forward-looking statements by
words such as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘should,’’ and
‘‘would’’ or similar words. You should not rely on forward looking statements because they involve known
and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks,
uncertainties and other factors may cause our actual results, performance or achievements to differ
materially from the anticipated future results, performance or achievements expressed or implied by the
forward looking statements. Some of the factors that might cause these differences are described under
Item 1A—‘‘Risk Factors.’’ You should carefully review all of these factors, and you should be aware that
there may be other factors that could cause these differences. These forward-looking statements were based
on information, plans and estimates at the date of this report, and, except as required by law, we undertake
no obligation to update any forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
In this Annual Report on Form 10-K, references to ‘‘the Company,’’ ‘‘Watts Water,’’ ‘‘we,’’ ‘‘us’’ or
‘‘our’’ refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.
Overview
Watts Regulator Co. was founded by Joseph E. Watts in 1874 in Lawrence, Massachusetts. Watts
Regulator Co. started as a small machine shop supplying parts to the New England textile mills of the
19th century and grew into a global manufacturer of products and systems focused on the control,
conservation and quality of water and the comfort and safety of the people using it. Watts Water
Technologies, Inc. was incorporated in Delaware in 1985 and became the parent company of Watts
Regulator Co.
Our strategy is to be the leading provider of water quality, water conservation, water safety and
water flow control products for the residential and commercial markets in the Americas and EMEA
(Europe, Middle East and Africa) and to expand our presence in Asia Pacific. Our primary objective is
to grow earnings by increasing sales within existing markets, expanding into new markets, leveraging
our distribution channels and customer base, making selected acquisitions, reducing manufacturing costs
and advocating for the development and enforcement of industry standards.
We intend to continue to expand organically by introducing products in existing markets, by
enhancing our preferred brands, by developing new complementary products, by promoting plumbing
code development to drive sales of safety and water quality products and by continually improving
merchandising in both the do-it-yourself (DIY) and wholesale distribution channels. We continually
target selected new product and geographic markets based on growth potential, including our ability to
leverage our existing distribution channels. Additionally, we continually leverage our distribution
channels through the introduction of new products, as well as the integration of products of our
acquired companies.
We intend to continue to generate incremental growth by targeting selected acquisitions, both in
our core markets as well as new complementary markets. We have completed 36 acquisitions since
1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name products
that address our themes of water quality, water conservation, water safety, water flow control and
comfort and related complementary markets. We target businesses that will provide us with one or
more of the following: an entry into new markets, an increase in shelf space with existing customers,
strong brand names, a new or improved technology or an expansion of the breadth of our product
offerings.
2
We are committed to reducing our manufacturing and operating costs through a combination of
manufacturing in lower-cost countries, using Lean and Six Sigma to drive continuous improvement
across all key processes, and consolidating our diverse manufacturing operations in Americas, EMEA
and Asia Pacific. We have a number of manufacturing facilities in lower-cost regions such as Mexico,
China, Bulgaria and Tunisia. In recent years, we have announced several global restructuring plans to
reduce our manufacturing footprint in order to reduce our costs and to realize additional operating
efficiencies.
Our products are sold to wholesale distributors and dealers, major DIY chains and original
equipment manufacturers (OEMs). Most of our sales are for products that have been approved under
regulatory standards incorporated into state and municipal plumbing, heating, building and fire
protection codes in North America and Europe. We have consistently advocated for the development
and enforcement of plumbing codes and are committed to providing products to meet these standards,
particularly for safety and control valve products.
Additionally, a majority of our manufacturing facilities are ISO 9000, 9001 or 9002 certified by the
International Organization for Standardization.
Our business is reported in three geographic segments: Americas, EMEA and Asia Pacific. Our
Americas segment was formerly referred to as North America and our Asia Pacific segment was
formerly referred to as Asia. We changed the description of our North America segment to the
Americas to reflect the broadening of our focus to include Latin America and we changed the
description of our Asia segment to Asia Pacific to reflect the broadening of our focus in that region to
include Asian countries outside of China as well as Australia and New Zealand. The contributions of
each segment to net sales, operating income and the presentation of certain other financial information
by segment are reported in Note 16 of the Notes to Consolidated Financial Statements and in
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ included
elsewhere in this report.
Products
We have a broad range of products in terms of design distinction, size and configuration. We
classify our many products into four universal product lines. These product lines are:
(cid:129) Residential & commercial flow control products—includes products typically sold into plumbing
and hot water applications such as backflow preventers, water pressure regulators, temperature
and pressure relief valves, and thermostatic mixing valves. In 2013, 2012 and 2011, residential &
commercial flow control products accounted for approximately 61%, 61% and 60%, respectively,
of our total sales.
(cid:129) HVAC & gas products—includes hydronic and electric heating systems for under-floor radiant
applications, hydronic pump groups for boiler manufacturers and alternative energy control
packages, and flexible stainless steel connectors for natural and liquid propane gas in
commercial food service and residential applications. In 2013, 2012 and 2011, HVAC & gas
products accounted for approximately 24%, 24% and 25%, respectively, of our total sales.
HVAC is an acronym for heating, ventilation and air conditioning.
(cid:129) Drains & water re-use products—includes drainage products and engineered rain water
harvesting solutions for commercial, industrial, marine and residential applications. Drains &
water re-use products accounted for approximately 10% of our total sales in each of 2013, 2012
and 2011.
(cid:129) Water quality products—includes point-of-use and point-of-entry water filtration, conditioning
and scale prevention systems for both commercial and residential applications. Water quality
products accounted for approximately 5% of our total sales in each of 2013, 2012 and 2011.
3
Customers and Markets
We sell our products to plumbing, heating and mechanical wholesale distributors, major DIY
chains and OEMs.
Wholesalers. Approximately 64% of our sales in 2013, and 63% of our sales in each of 2012 and
2011, were to wholesale distributors for commercial and residential applications. We rely on
commissioned manufacturers’ representatives, some of which maintain a consigned inventory of our
products, to market our product lines. Additionally, various water quality products are sold to
independent dealers throughout the Americas.
DIY Chains. Approximately 13% of our sales in each of 2013, 2012 and 2011 were to DIY chains.
Our DIY chains demand less technical products, but are highly receptive to innovative designs and new
product ideas.
OEMs. Approximately 23% of our sales in 2013, and 24% of our sales in each of 2012 and 2011,
were to OEMs. In the Americas, our typical OEM customers are water heater manufacturers and
equipment and water systems manufacturers needing flow control devices and other products. Our sales
to OEMs in EMEA are primarily to boiler manufacturers and radiant system manufacturers. Our sales
to OEMs in Asia Pacific are primarily to boiler, water heaters and bath manufacturers including
manufacturers of faucet and shower products.
In 2013, 2012 and 2011, no customer accounted for more than 10% of our total net sales. Our top
ten customers accounted for approximately $321.7 million, or 22%, of our total net sales in 2013;
$309.3 million, or 22%, of our total net sales in 2012; and $290.4 million, or 21%, of our total net sales
in 2011. Thousands of other customers constituted the balance of our net sales in each of those years.
Marketing and Sales
For product sales, we rely primarily on commissioned manufacturers’ representatives, some of
which maintain a consigned inventory of our products. These representatives sell primarily to plumbing
and heating wholesalers or service DIY stores in the Americas. We also sell products for the residential
construction and home repair and remodeling industries through DIY plumbing retailers, national
catalog distribution companies, hardware stores, building material outlets and retail home center chains
and through plumbing and heating wholesalers. In addition, we sell products directly to wholesalers,
OEMs and private label accounts primarily in EMEA and to a lesser extent in the Americas.
Manufacturing
We have integrated and automated manufacturing capabilities, including a lead free foundry and a
traditional brass and bronze foundry, machining, plastic extrusion and injection molding and assembly
operations. Our foundry operations include metal pouring systems, automatic core making, brass
forging and brass and bronze die-castings. Our machining operations feature computer-controlled
machine tools, high-speed chucking machines with robotics and automatic screw machines for
machining bronze, brass and steel components. We have invested in recent years to expand our
manufacturing capabilities to ensure the availability of the most efficient and productive equipment. In
response to the U.S. federal Reduction of Lead in Drinking Water Act, we committed approximately
$18.3 million in capital spending ($9.8 million in 2013 and $8.5 million spent in 2012) for a new
foundry and machinery in the U.S. to produce lead free products. The foundry cost and related
equipment were commissioned during the second quarter of 2013. We are committed to maintaining
our manufacturing equipment at a level consistent with current technology in order to maintain high
levels of quality and manufacturing efficiencies.
4
Capital expenditures and depreciation for each of the last three years were as follows:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw Materials
Years Ended
December 31,
2013
2012
2011
(in millions)
$30.5
$33.1
$27.7
$34.2
$22.5
$32.1
We require substantial amounts of raw materials to produce our products, including bronze, brass,
cast iron, stainless steel, steel, plastic, and components used in products, and substantially all of the raw
materials we require are purchased from outside sources. The commodity markets have experienced
tremendous volatility over the past several years, particularly with respect to copper. During 2011, spot
copper prices increased to historic highs early in the year, and then trended downward in the second
half of 2011. In 2012, increases in the first quarter and third quarter were offset by more moderate
pricing in the second quarter and fourth quarter. In 2013, spot copper prices in the first quarter
trended higher, with prices declining to a consistent level through the remainder of the year. Bronze
and brass are copper-based alloys. The fact that we source internationally a significant amount of raw
materials means that several months of raw materials and work in process are moving through our
business at any point in time. We are not able to predict whether commodity costs, including copper,
will significantly increase or decrease in the future. If commodity costs increase in the future and we
are not able to reduce or eliminate the effect of the cost increases by reducing production costs or
implementing price increases, our profit margins could decrease. If commodity costs were to decline,
we may experience pressures from customers to reduce our selling prices. The timing of any price
reductions and decreases in commodity costs may not align. As a result, our margins could be affected.
With limited exceptions, we have multiple suppliers for our commodities and other raw materials.
We believe our relationships with our key suppliers are good and that an interruption in supply from
any one supplier would not materially affect our ability to meet our immediate demands while another
supplier is qualified. We regularly review our suppliers to evaluate their strengths. If a supplier is
unable to meet our demands, we believe that in most cases our inventory of raw materials will allow for
sufficient time to identify and obtain the necessary commodities and other raw materials from an
alternate source. We believe that the nature of the commodities and other raw materials used in our
business are such that multiple sources are generally available in the market.
Code Compliance
Products representing a majority of our sales are subject to regulatory standards and code
enforcement, which typically require that these products meet stringent performance criteria. Standards
are established by such industry test and certification organizations as the American Society of
Mechanical Engineers (A.S.M.E.), the Canadian Standards Association (C.S.A.), the American Society
of Sanitary Engineers (A.S.S.E.), the University of Southern California Foundation for Cross-
Connection Control (USC FCC), the International Association of Plumbing and Mechanical Officials
(I.A.P.M.O.), Factory Mutual (F.M.), the National Sanitation Foundation (N.S.F.) and Underwriters
Laboratory (U.L.). Many of these standards are incorporated into state and municipal plumbing and
heating, building and fire protection codes.
National regulatory standards in Europe vary by country. The major standards and/or guidelines
that our products must meet are AFNOR (France), DVGW (Germany), UNI/ICIN (Italy), KIWA
(Netherlands), SVGW (Switzerland), SITAC (Sweden) and WRAS (United Kingdom). Further, there
are local regulatory standards requiring compliance as well.
Together with our commissioned manufacturers’ representatives, we have consistently advocated for
the development and enforcement of plumbing codes. We maintain stringent quality control and testing
5
procedures at each of our manufacturing facilities in order to manufacture products that comply with
code requirements. We believe that product-testing capability and investment in plant and equipment is
needed to manufacture products that comply with code requirements. Additionally, a majority of our
manufacturing facilities are ISO 9000, 9001 or 9002 certified by the International Organization for
Standardization.
New Product Development and Engineering
We maintain our own product development staff, design teams, and testing laboratories in
Americas, EMEA and Asia Pacific that work to enhance our existing products and develop new
products. We maintain sophisticated product development and testing laboratories. Research and
development costs included in selling, general, and administrative expense amounted to $21.5 million,
$20.4 million and $20.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Between 2010 and 2012, California, Louisiana, Maryland and Vermont implemented laws that
require all pipes, pipe and plumbing fittings and plumbing fixtures sold in those states that convey or
dispense water for human consumption to contain no more than 0.25% lead content, which is generally
referred to as lead free. On January 4, 2011, the federal government enacted a similar law that took
effect nationwide in January 2014. We have invested considerable resources over the past several years
to develop lead free versions of our plumbing products to comply with the new laws, and we
successfully introduced our lead free product offerings in California, Louisiana, Maryland and Vermont.
In response to the nationwide lead free law, we committed approximately $18.3 million in capital
spending over the last two years for a new foundry and machinery in the U.S. to meet expected lead
free demand for our products sold in the U.S. Construction of the new foundry was completed and the
new facility was commissioned during the second quarter of 2013.
Complying with these new requirements on a nationwide basis is a challenge for us. The new
requirements may cause our material costs to increase as suppliers of alternative lead free metals are
currently limited and lead free alloy substitutes are more expensive than the original leaded alloys. We
may not succeed in passing through these cost increases to our customers. Our new lead free foundry
has been operating since June 2013. As expected, we experienced some technical challenges in our new
manufacturing process involved with the lead free alloys. But as of year-end, while our new foundry was
not running at full capacity, production volumes were ramping up and down time has been minimized.
The majority of our customers have converted to lead free products by year-end and, and we currently
have been able to maintain our gross margin percentages, despite the higher cost of the new alloys.
Competition
The domestic and international markets for water quality, water conservation, water safety and
water flow control devices are intensely competitive and require us to compete against some companies
possessing greater financial, marketing and other resources than ours. Due to the breadth of our
product offerings, the number and identities of our competitors vary by product line and market. We
consider quality, brand preference, delivery times, engineering specifications, plumbing code
requirements, price, technological expertise and breadth of product offerings to be the primary
competitive factors. We believe that new product development and product engineering are also
important to success in the water industry and that our position in the industry is attributable in part to
our ability to develop new and innovative products quickly and to adapt and enhance existing products.
We continue to develop new and innovative products to enhance our market position and are
continuing to implement manufacturing and design programs to reduce costs. We cannot be certain that
our efforts to develop new products will be successful or that our customers will accept our new
products. Although we own certain patents and trademarks that we consider to be of importance, we
do not believe that our business and competitiveness as a whole are dependent on any one of our
patents or trademarks or on patent or trademark protection generally.
6
Backlog
Backlog was approximately $84.4 million at February 7, 2014 and approximately $84.5 million at
February 8, 2013. We do not believe that our backlog at any point in time is indicative of future
operating results and we expect our entire current backlog to be converted to sales in 2014.
Employees
As of December 31, 2013, we employed approximately 5,900 people worldwide. With the exception
of our tekmar subsidiary in Canada, none of our employees in North America or Asia are covered by
collective bargaining agreements. In some European countries, our employees are subject to traditional
national collective bargaining agreements. We believe that our employee relations are good.
Available Information
We maintain a website with the address www.wattswater.com. The information contained on our
website is not included as a part of, or incorporated by reference into, this Annual Report on
Form 10-K. Other than an investor’s own internet access charges, we make available free of charge
through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we
have electronically filed such material with, or furnished such material to, the Securities and Exchange
Commission (SEC).
Executive Officers and Directors
Set forth below in alphabetical order are the names of our executive officers and directors, their
respective ages and positions with our Company and a brief summary of their business experience for
at least the past five years:
Executive Officers
Age
Position
Dean P. Freeman . . . . . . . . . . .
Kenneth R. Lepage . . . . . . . . .
50 Chief Executive Officer, President, and Chief Financial Officer
43 General Counsel, Executive Vice President of Human
Elie Melhem . . . . . . . . . . . . . .
Mario Sanchez . . . . . . . . . . . .
A. Suellen Torregrosa . . . . . . .
50
57
51
Non-Employee Directors
Resources and Secretary
President, Asia Pacific
President and Group Managing Director, EMEA
President, Americas
Robert L. Ayers(2)(3) . . . . . . .
Bernard Baert(1)(3) . . . . . . . .
Kennett F. Burnes(1)(3) . . . . . .
Richard J. Cathcart(2)(3) . . . . .
W. Craig Kissel(2)(3) . . . . . . . .
John K. McGillicuddy(1)(3) . . .
Joseph T. Noonan . . . . . . . . . .
Merilee Raines(1)(3) . . . . . . . .
68 Director
64 Director
71 Director
69 Director
63 Director
70 Chairman of the Board and Director
32 Director
58 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Corporate Governance Committee
Dean P. Freeman was appointed interim Chief Executive Officer and President of our Company in
January 2014. Mr. Freeman originally joined our Company in October 2012 and was appointed
Executive Vice President and Chief Financial Officer in November 2012. Mr. Freeman previously
served as Senior Vice President of Finance and Treasurer of Flowserve Corporation from October 2009
to October 2011. Also while at Flowserve, Mr. Freeman served as Vice President, Finance and Chief
7
Financial Officer of the Flowserve Pump Division from 2006 to October 2009. Flowserve is a leading
global provider of fluid motion and control products and services, producing engineered and industrial
pumps, seals and valves as well as a range of related flow management services. Prior to Flowserve,
Mr. Freeman served as Chief Financial Officer, Europe for The Stanley Works Corporation.
Mr. Freeman also served in financial executive and management roles of progressive responsibility with
United Technologies Corporation and SPX Corporation.
Kenneth R. Lepage was appointed General Counsel and Secretary of the Company in August 2008
and Executive Vice President of Human Resources in December 2009. Mr. Lepage originally joined our
Company in September 2003 as Assistant General Counsel and Assistant Secretary. Prior to joining our
Company, he was a junior partner at the law firm of Hale and Dorr LLP (now Wilmer Cutler Pickering
Hale and Dorr LLP).
Elie Melhem joined our Company in July 2011 as President, Asia Pacific. Mr. Melhem was
previously the Managing Director of China for Ariston Thermo Group, a global manufacturer of
heating and hot water products, from 2008 to July 2011. Prior to joining Ariston, Mr. Melhem spent
eleven years with ITT Industries in China where he held several management positions, including
serving as President of ITT’s Residential and Commercial Water Group in China and President of
ITT’s Water Technology Group in Asia.
Mario Sanchez was appointed President and Group Managing Director, EMEA in June 2013.
Mr. Sanchez originally joined our Company in January 2012 as Vice President of Plumbing and
Heating, EMEA. Mr. Sanchez previously served as Vice President of Global Manufacturing for Johnson
Controls, Inc. from September 2008 to January 2012. Johnson Controls is a global diversified
technology and industrial company providing products, services and solutions to optimize energy and
operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid
and electric vehicles; and interior systems for automobiles. Before joining Johnson Controls,
Mr. Sanchez served as Vice President of Global Operations for Tyco International, Ltd. from December
2006 to August 2008. Tyco is a global provider of fire protection and security products and services.
Prior to Tyco, Mr. Sanchez held several global management positions with Ingersoll-Rand plc.
A. Suellen Torregrosa joined our Company in August 2013 as President, Americas. Ms. Torregrosa
previously served as President of Milton Roy Company from November 2011 to June 2013. Milton Roy
Company is a global manufacturer of controlled volume (metering) pumps and related equipment.
Ms. Torregrosa was appointed President of Milton Roy Company when it was owned by United
Technologies Corporation and continued to serve as President through its sale to a private equity group
in December 2012. Ms. Torregrosa worked for several business units of United Technologies
Corporation from 1990 until the sale of Milton Roy Company in December 2012, including as Vice
President and General Manager, Americas of Milton Roy Company from 2006 until November 2011,
General Manager, Dynamic Controls of Hamilton Sundstrand Company from 2002 to 2006, and in
several management roles of progressive responsibility for Falk Corporation from 1990 to 2002. United
Technologies Corporation is a diversified provider of high technology products and services to the
building and aerospace industries.
Robert L. Ayers has served as a director of our Company since October 2006. He was Senior Vice
President of ITT Industries and President of ITT Industries’ Fluid Technology from October 1999 until
September 2005. Mr. Ayers continued to be employed by ITT Industries from September 2005 until his
retirement in September 2006, during which time he focused on special projects for the company.
Mr. Ayers joined ITT Industries in 1998 as President of ITT Industries’ Industrial Pump Group. Before
joining ITT Industries, he was President of Sulzer Industrial USA and Chief Executive Officer of Sulzer
Bingham, a pump manufacturer. Mr. Ayers served as a director of T-3 Energy Services, Inc. from
August 2007 to January 2011.
8
Bernard Baert was elected as a member of our Board of Directors in August 2011. Mr. Baert has
served as Senior Vice President and President, Europe and International of PolyOne Corporation since
January 2010. Mr. Baert served as Senior Vice President and General Manager, Color and Engineered
Materials—Europe and China for PolyOne Corporation from 2006 to December 2009 and as Vice
President and General Manager, Color and Engineered Materials—Europe and China from 2000 to
2006. From 1995 to September 2000, Mr. Baert was General Manager, Color—Europe for M.A. Hanna
Company, the predecessor to PolyOne Corporation. PolyOne Corporation is a worldwide provider of
specialty polymer materials, services and solutions. Prior to joining M.A. Hanna, Mr. Baert was General
Manager, Europe for Hexcel Corporation and spent 17 years with Owens Corning where he served as a
plant manager and held various positions in the areas of cost control and production.
Kennett F. Burnes became a director of our Company in February 2009. Mr. Burnes is the retired
Chairman, President and Chief Executive Officer of Cabot Corporation, a global specialty chemicals
company. He was Chairman from 2001 to March 2008, President from 1995 to January 2008 and Chief
Executive Officer from 2001 to January 2008. Prior to joining Cabot Corporation in 1987, Mr. Burnes
was a partner at the Boston-based law firm of Choate, Hall & Stewart, where he specialized in
corporate and business law for nearly 20 years. He is a director of State Street Corporation, a member
of the Dana Farber Cancer Institute’s Board of Trustees and a board member of the New England
Conservatory. Mr. Burnes is also Chairman of the Board of Trustees of the Schepens Eye Research
Institute.
Richard J. Cathcart has served as a director of our Company since October 2007. He was Vice
Chairman and a member of the Board of Directors of Pentair, Inc. from February 2005 until his
retirement in September 2007. Pentair is a diversified manufacturing company consisting of two
operating segments: Water Technologies and Technical Products. He was appointed President and Chief
Operating Officer of Pentair’s Water Technologies Group in January 2001 and served in that capacity
until his appointment as Vice Chairman in February 2005. He began his career at Pentair in March
1995 as Executive Vice President, Corporate Development, where he identified water as a strategic area
of growth. In February 1996, he was named Executive Vice President and President of Pentair’s Water
Technologies Group. Prior to joining Pentair, he held several management and business development
positions during his 20-year career with Honeywell International Inc. He is a director of Fluidra S.A.
W. Craig Kissel was elected as a member of our Board of Directors in November 2011. Mr. Kissel
previously was employed by Trane Inc. (formerly known as American Standard Companies Inc.) from
1980 until his retirement in September 2008. During his time at Trane, Mr. Kissel served as President
of Trane Commercial Systems from 2004 to June, 2008, President of WABCO Vehicle Control Systems
from 1998 to 2003, President of Trane’s North American Unitary Products Group from 1994 to 1997,
Vice President of Marketing of Trane’s North American Unitary Products Group from 1992 to 1994
and held various other management positions at Trane from 1980 to 1991. Trane is a leading worldwide
supplier of air conditioning and heating systems, and WABCO is a leading worldwide supplier of
commercial vehicle control systems. From 2001 to 2008, Mr. Kissel served as Chairman of Trane’s
Corporate Ethics and Integrity Council, which was responsible for developing the company’s ethical
business standards. Mr. Kissel also served in the U.S. Navy from 1973 to 1978. Mr. Kissel has served as
a director of Chicago Bridge & Iron Company since May 2009. Chicago Bridge & Iron Company
engineers and constructs some of the world’s largest energy infrastructure projects.
John K. McGillicuddy has served as a director of our Company since 2003. He was employed by
KPMG LLP, a public accounting firm, from 1965 until his retirement in 2000. He was elected into the
Partnership at KPMG LLP in June 1975 where he served as Audit Partner, SEC Reviewing Partner,
Partner-in-Charge of Professional Practice, Partner-in-Charge of College Recruiting and
Partner-in-Charge of Staff Scheduling. He is a director of Brooks Automation, Inc. and Cabot
Corporation.
Joseph T. Noonan was elected as a member of our Board of Directors in May 2013. Mr. Noonan
has served as Chief Executive Officer of Homespun Design, Inc. since November 2013. Homespun
9
Design is a start-up phase online retailer of American-made furniture and design founded by
Mr. Noonan. Mr. Noonan previously worked as an independent digital strategy consultant from
November 2012 to November 2013. Mr. Noonan was employed by Wayfair LLC from April 2008 to
November 2012. During his time at Wayfair, Mr. Noonan served as Senior Director of Wayfair
International from June 2011 to November 2012, Director of Category Management and Merchandising
from February 2009 to June 2011 and Manager of Wayfair’s Business-to-Business Division from April
2008 to February 2009. Wayfair is an online retailer of home furnishings, d´ecor and home improvement
products. Prior to joining Wayfair, Mr. Noonan worked as a venture capitalist at Polaris Partners and as
an investment banker at Cowen & Company.
Merilee Raines has served as a director of our Company since February 2011. Ms. Raines served as
Chief Financial Officer of IDEXX Laboratories, Inc. from October 2003 until her retirement in May
2013. Prior to becoming Chief Financial Officer, Ms. Raines held several management positions with
IDEXX Laboratories, including Corporate Vice President of Finance, Vice President and Treasurer of
Finance, Director of Finance, and Controller. IDEXX Laboratories develops, manufactures and
distributes diagnostic and information technology-based products and services for companion animals,
livestock, poultry, water quality and food safety, and human point-of-care diagnostics. Ms. Raines is a
director of Aratana Therapeutics, Inc.
Product Liability, Environmental and Other Litigation Matters
We are subject to a variety of potential liabilities connected with our business operations, including
potential liabilities and expenses associated with possible product defects or failures and compliance
with environmental laws. We maintain product liability and other insurance coverage, which we believe
to be generally in accordance with industry practices. Nonetheless, such insurance coverage may not be
adequate to protect us fully against substantial damage claims.
Contingencies
Trabakoolas et al., v, Watts Water Technologies, Inc., et al.,
On December 12, 2013, we reached an agreement in principle to settle all claims. The total
settlement amount is $23.0 million, of which we are expected to be responsible for $14 million after
insurance proceeds of $9 million. The settlement was subject to review by the Court at a preliminary
approval hearing held on February 12, 2014. The Court granted preliminary approval on February 14,
2014. The settlement is subject to final court approval after a fairness hearing, currently scheduled for
July 16, 2014. Accordingly, there can be no assurance that the proposed settlement will be approved in
its current form. If the settlement is not approved, the Company intends to continue to vigorously
contest the allegations in this case.
Environmental Remediation
We have been named as a potentially responsible party with respect to a limited number of
identified contaminated sites. The levels of contamination vary significantly from site to site as do the
related levels of remediation efforts. Environmental liabilities are recorded based on the most probable
cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted to their
present value, unless the amount and timing of expenditures are fixed and reliably determinable. We
accrue estimated environmental liabilities based on assumptions, which are subject to a number of
factors and uncertainties. Circumstances that can affect the reliability and precision of these estimates
include identification of additional sites, environmental regulations, level of clean-up required,
technologies available, number and financial condition of other contributors to remediation and the
time period over which remediation may occur. We recognize changes in estimates as new remediation
requirements are defined or as new information becomes available.
10
Asbestos Litigation
We are defending approximately 44 lawsuits in different jurisdictions, alleging injury or death as a
result of exposure to asbestos. The complaints in these cases typically name a large number of
defendants and do not identify any particular Watts Water products as a source of asbestos exposure.
To date, we have obtained a dismissal in every case before it has reached trial because discovery has
failed to yield evidence of substantial exposure to any Watts Water products.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also
pending or threatened against us.
11
Item 1A. RISK FACTORS.
Economic cycles, particularly those involving reduced levels of commercial and residential starts and
remodeling, may have adverse effects on our revenues and operating results.
We have experienced and expect to continue to experience fluctuations in revenues and operating
results due to economic and business cycles. The businesses of most of our customers, particularly
plumbing and heating wholesalers and home improvement retailers, are cyclical. Therefore, the level of
our business activity has been cyclical, fluctuating with economic cycles. An economic downturn may
also affect the financial stability of our customers, which could affect their ability to pay amounts owed
to their vendors, including us. We also believe our level of business activity is influenced by commercial
and residential starts and renovation and remodeling, which are, in turn, heavily influenced by interest
rates, consumer debt levels, changes in disposable income, employment growth and consumer
confidence. Credit market conditions may prevent commercial and residential builders or developers
from obtaining the necessary capital to continue existing projects or to start new projects. This may
result in the delay or cancellation of orders from our customers or potential customers and may
adversely affect our revenues and our ability to manage inventory levels, collect customer receivables
and maintain profitability. Further, the Euro Zone has been in recession since 2011 triggered by
sovereign debt concerns and general economic malaise. If economic conditions worsen in the future or
if economic recovery were to dissipate, our revenues and profits could decrease or trigger additional
goodwill, indefinite-lived intangible assets, or long-lived asset impairments and could have a material
effect on our financial condition and results of operations.
We face intense competition and, if we are not able to respond to competition in our markets, our revenues
may decrease.
Competitive pressures in our markets could adversely affect our competitive position, leading to a
possible loss of market share or a decrease in prices, either of which could result in decreased revenues
and profits. We encounter intense competition in all areas of our business. Additionally, we believe our
customers are attempting to reduce the number of vendors from which they purchase in order to
reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we
will need to invest continually in manufacturing, product development, marketing, customer service and
support and our distribution networks. We may not have sufficient resources to continue to make such
investments and we may be unable to maintain our competitive position. In addition, we anticipate that
we may have to reduce the prices of some of our products to stay competitive, potentially resulting in a
reduction in the profit margin for, and inventory valuation of, these products. Some of our competitors
are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly,
currency fluctuations could cause our U.S. dollar costed products to be less competitive than our
competitors’ products which are priced in other currencies.
Changes in the costs of raw materials could reduce our profit margins. Reductions or interruptions in the
supply of components or finished goods from international sources could adversely affect our ability to meet
our customer delivery commitments.
We require substantial amounts of raw materials, including bronze, brass, cast iron, steel and
plastic, and substantially all of the raw materials we require are purchased from outside sources. The
costs of raw materials may be subject to change due to, among other things, interruptions in production
by suppliers and changes in exchange rates and worldwide price and demand levels. We typically do not
enter into long-term supply agreements. Our inability to obtain supplies of raw materials for our
products at favorable costs could have a material adverse effect on our business, financial condition or
results of operations by decreasing our profit margins. The commodity markets have experienced
tremendous volatility over the past several years, particularly copper. Should commodity costs increase
substantially, we may not be able to recover such costs, through selling price increases to our customers
or other product cost reductions, which would have a negative effect on our financial results. If
commodity costs decline, we may experience pressure from customers to reduce our selling prices.
12
Additionally, we continue to purchase increased levels of components and finished goods from
international sources. In limited cases, these components or finished goods are single-sourced. The
availability of components and finished goods from international sources could be adversely impacted
by, among other things, interruptions in production by suppliers, suppliers’ allocations to other
purchasers and new laws or regulations.
Government regulations could limit or delay our ability to market or sell our products and could affect raw
material sourcing and/or increase our costs.
Effective January 4, 2014, the Reduction of Lead in Drinking Water Act reduced the permissible
weighted average lead content in faucets, fittings and valves used in potable water applications from
8% to 0.25% throughout the United States. The new law is consistent with laws previously in effect in
California, Maryland, Louisiana and Vermont. Prior to 2013, we had introduced lead free products for
sale in California, Maryland, Louisiana and Vermont, and we offer a large selection of lead free
compliant valves and fittings. Complying with these new requirements throughout the United States
poses a significant challenge for us. The nationwide requirements have caused our material costs to
increase as suppliers of alternative lead free metals are currently limited and lead free alloy substitutes
are more expensive than the original leaded alloys. We may not succeed in passing through all these
cost increases to our customers. We have and may continue to experience technical challenges in our
new lead free manufacturing operations to produce more lead free products. In addition, we could have
difficulty providing sufficient quantities of our lead free compliant products to meet nationwide
demand. These requirements could have a material effect on our financial condition and results of
operation.
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
Dodd-Frank Act) requires the SEC to establish new disclosure and reporting requirements regarding
specified minerals originating in the Democratic Republic of the Congo or an adjoining country that
are necessary to the functionality or production of products manufactured by companies required to file
reports with the SEC. The final rules implementing these requirements, as released in 2012 by the
SEC, could affect sourcing at competitive prices and availability in sufficient quantities of minerals used
in the manufacture of our products. In addition, because our supply chain is complex, we may face
commercial challenges if we are unable to verify sufficiently the origins for all metals used in our
products through the due diligence procedures that we implement and otherwise may become obliged
to disclose publicly those efforts with regard to conflict minerals. Moreover, we may encounter
challenges to satisfy those customers who require that all of the components of our products be
certified as conflict free, which could place us at a competitive disadvantage if we are unable to do so.
Implementation of our acquisition strategy may not be successful, which could affect our ability to increase
our revenues or our profitability.
One of our strategies is to increase our revenues and profitability and expand our business through
acquisitions that will provide us with complementary products and increase market share for our
existing product lines. We cannot be certain that we will be able to identify, acquire or profitably
manage additional companies or successfully integrate such additional companies without substantial
costs, delays or other problems. Also, companies acquired recently and in the future may not achieve
revenues, profitability or cash flows that justify our investment in them. We have faced increasing
competition for acquisition candidates, which has resulted in significant increases in the purchase prices
of many acquisition candidates. This competition, and the resulting purchase price increases, may limit
the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of
growth of our revenues and profitability. In addition, acquisitions may involve a number of risks,
including, but not limited to:
(cid:129) inadequate internal controls over financial reporting and our ability to bring such controls into
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely
manner;
13
(cid:129) adverse short-term effects on our reported operating results;
(cid:129) diversion of management’s attention;
(cid:129) investigations of, or challenges to, acquisitions by competition authorities;
(cid:129) loss of key personnel at acquired companies;
(cid:129) unanticipated management or operational problems or legal liabilities; and
(cid:129) potential goodwill, indefinite-lived intangible assets, or long-lived asset impairment charges.
We are subject to risks related to product defects, which could result in product recalls and could subject us to
warranty claims in excess of our warranty provisions or which are greater than anticipated due to the
unenforceability of liability limitations.
We maintain strict quality controls and procedures, including the testing of raw materials and
safety testing of selected finished products. However, we cannot be certain that our testing will reveal
latent defects in our products or the materials from which they are made, which may not become
apparent until after the products have been sold into the market. We also cannot be certain that our
suppliers will always eliminate latent defects in products we purchase from them. Accordingly, there is
a risk that product defects will occur, which could require a product recall. Product recalls can be
expensive to implement and, if a product recall occurs during the product’s warranty period, we may be
required to replace the defective product. In addition, a product recall may damage our relationship
with our customers and we may lose market share with our customers. Our insurance policies may not
cover the costs of a product recall.
Our standard warranties contain limits on damages and exclusions of liability for consequential
damages and for misuse, improper installation, alteration, accident or mishandling while in the
possession of someone other than us. We may incur additional operating expenses if our warranty
provision does not reflect the actual cost of resolving issues related to defects in our products. If these
additional expenses are significant, it could adversely affect our business, financial condition and results
of operations.
We face risks from product liability and other lawsuits, which may adversely affect our business.
We have been and expect to continue to be subject to various product liability claims or other
lawsuits, including, among others, that our products include inadequate or improper instructions for use
or installation, or inadequate warnings concerning the effects of the failure of our products. If we do
not have adequate insurance or contractual indemnification, damages from these claims would have to
be paid from our assets and could have a material adverse effect on our results of operations, liquidity
and financial condition. Like other manufacturers and distributors of products designed to control and
regulate fluids and gases, we face an inherent risk of exposure to product liability claims and other
lawsuits in the event that the use of our products results in personal injury, property damage or
business interruption to our customers. We cannot be certain that our products will be completely free
from defect. In addition, in certain cases, we rely on third-party manufacturers for our products or
components of our products. We cannot be certain that our insurance coverage will continue to be
available to us at a reasonable cost, or, if available, will be adequate to cover any such liabilities. For
more information, see ‘‘Item 1. Business—Product Liability, Environmental and Other Litigation
Matters.’’
14
Economic and other risks associated with international sales and operations could adversely affect our
business and future operating results.
Since we sell and manufacture our products worldwide, our business is subject to risks associated
with doing business internationally. Our business and future operating results could be harmed by a
variety of factors, including:
(cid:129) unexpected geo-political events in foreign countries in which we operate, which could adversely
affect manufacturing and our ability to fulfill customer orders;
(cid:129) our inability to comply with anti-corruption laws and regulations of the U.S. government and
various international jurisdictions, such as the U.S. Foreign Corrupt Practices Act and the
United Kingdom’s Bribery Act of 2010;
(cid:129) trade protection measures and import or export licensing requirements, which could increase our
costs of doing business internationally;
(cid:129) potentially negative consequences from changes in tax laws, which could have an adverse impact
on our profits;
(cid:129) difficulty in staffing and managing widespread operations, which could reduce our productivity;
(cid:129) costs of compliance with differing labor regulations, especially in connection with restructuring
our overseas operations;
(cid:129) laws of some foreign countries, which may not protect our intellectual property rights to the
same extent as the laws of the United States;
(cid:129) unexpected changes in regulatory requirements, which may be costly and require time to
implement; and
(cid:129) foreign exchange rate fluctuations, which could also materially affect our reported results. A
portion of our sales and certain portions of our costs, assets and liabilities are denominated in
currencies other than U.S. dollars, and the percentage of our revenues denominated in a
particular currency may not match the percentage of our expenses denominated in that currency.
Approximately 46.5% of our sales during the year ended December 31, 2013 were from sales
outside of the U.S. compared to 47.6% for the year ended December 31, 2012. We cannot
predict whether currencies such as the Euro, Canadian dollar or Chinese yuan will appreciate or
depreciate against the U.S. dollar in future periods or whether future foreign exchange rate
fluctuations will have a positive or negative impact on our reported results.
Our ability to achieve savings through our restructuring plans may be adversely affected by local regulations
or factors beyond the control of management.
We have implemented a number of restructuring plans, which include steps that we believe are
necessary to reduce operating costs and increase efficiencies throughout our manufacturing, sales and
distribution footprint. Factors beyond the control of management may affect the timing and therefore
affect when the savings will be achieved under the plans. Further, if we are not successful in completing
the restructuring projects in the time frames contemplated or if additional issues arise during the
projects that add costs or disrupt customer service, then our operating results could be negatively
affected.
Future operating results could be negatively affected by the resolution of various uncertain tax positions and
by potential changes to tax incentives.
In the ordinary course of our business, there are many transactions and calculations where the
ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide
provision for income taxes. We periodically assess our exposures related to our worldwide provision for
income taxes and believe that we have appropriately accrued taxes for contingencies. Any reduction of
15
these contingent liabilities or additional assessment would increase or decrease income, respectively, in
the period such determination was made. Our income tax filings are regularly under audit by tax
authorities and the final determination of tax audits could be materially different than that which is
reflected in historical income tax provisions and accruals. As issues arise during tax audits we adjust
our tax accrual accordingly. Additionally, we benefit from certain tax incentives offered by various
jurisdictions. If we are unable to meet the requirements of such incentives, our inability to use these
benefits could have a material negative effect on future earnings.
We are currently a decentralized company, which presents certain risks.
We are currently a decentralized company, which sometimes places significant control and
decision-making powers in the hands of local management. This presents various risks such as the risk
of being slower to identify or react to problems affecting a key business. Additionally, we are
implementing in a phased approach a company-wide initiative to selectively standardize and upgrade
our enterprise resource planning (ERP) systems. This initiative could be more challenging and costly to
implement because divergent legacy systems currently exist. Further, if the ERP updates are not
successful, we could incur substantial business interruption, including our ability to perform routine
business transactions, which could have a material adverse effect on our financial results.
Our business and financial performance may be adversely affected by information technology and other
business disruptions.
Our business may be impacted by disruptions, including information technology attacks or failures,
threats to physical security, as well as damaging weather or other acts of nature, pandemics or other
public health crises. Cybersecurity attacks, in particular, are evolving and include, but are not limited
to, malicious software, attempts to gain unauthorized access to data, and other electronic security
breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise
protected information and corruption of data. We have experienced cybersecurity attacks and may
continue to experience them going forward, potentially with more frequency. Given the unpredictability
of the timing, nature and scope of such disruptions, we could potentially be subject to production
downtimes, operational delays, other detrimental impacts on our operations or ability to provide
products to our customers, the compromising of confidential or otherwise protected information,
misappropriation, destruction or corruption of data, security breaches, other manipulation or improper
use of our systems or networks, financial losses from remedial actions, loss of business or potential
liability, and/or damage to our reputation, any of which could have a material adverse effect on our
competitive position, results of operations, cash flows or financial condition.
The requirements to evaluate goodwill, indefinite-lived intangible assets and long-lived assets for impairment
may result in a write-off of all or a portion of our recorded amounts, which would negatively affect our
operating results and financial condition.
As of December 31, 2013, our balance sheet included goodwill, indefinite-lived intangible assets,
amortizable intangible assets and property, plant and equipment of $514.8 million, $41.9 million,
$199.0 million, and $219.9 million, respectively. In lieu of amortization, we are required to perform an
annual impairment review of both goodwill and indefinite-lived intangible assets. In performing our
annual reviews in 2013, 2012 and 2011, we recognized non-cash pre-tax charges of approximately
$0.7 million, $0.4 million and $1.4 million, respectively, as impairments of the indefinite-lived intangible
assets. In 2013, 2012 and 2011, we recognized pre-tax non-cash goodwill impairment charges of
$0.3 million, $1.0 million and $1.2 million, respectively, related to our Blue Ridge Atlantic
Enterprises, Inc. (BRAE) reporting unit within our Americas segment. We are also required to perform
an impairment review of our long-lived assets if indicators of impairment exist. In 2013 and 2012, we
recognized a pre-tax non-cash charge of $1.3 million and $1.6 million, respectively, to write down
long-term assets. In 2011, we recognized pre-tax non-cash long-lived asset impairment charges of
$14.8 million related to our Watts Insulation GmbH (Austroflex) operations within our EMEA
16
segment. We completed the sale of Austroflex on August 1, 2013, and Austroflex’s results of operations
have been presented as discontinued operations for all periods presented. There can be no assurances
that future goodwill, indefinite-lived intangible assets or other long-lived asset impairments will not
occur. We perform our annual test for indications of goodwill and indefinite-lived intangible assets
impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.
The loss or financial instability of major customers could have an adverse effect on our results of operations.
In 2013, our top ten customers accounted for approximately 22% of our total net sales with no one
customer accounting for more than 10% of our total net sales. Our customers generally are not
obligated to purchase any minimum volume of products from us and are able to terminate their
relationships with us at any time. In addition, increases in the prices of our products could result in a
reduction in orders from our customers. A significant reduction in orders from, or change in terms of
contracts with, any significant customers could have a material adverse effect on our future results of
operations. Furthermore, some of our major customers are facing financial challenges due to market
declines and heavy debt levels; should these challenges become acute, our results could be materially
adversely affected due to reduced orders and/or payment delays or defaults.
Certain indebtedness may limit our ability to pay dividends, incur additional debt and make acquisitions and
other investments.
Our revolving credit facility and other senior indebtedness contain operational and financial
covenants that restrict our ability to make distributions to stockholders, incur additional debt and make
acquisitions and other investments unless we satisfy certain financial tests and comply with various
financial ratios. If we do not maintain compliance with these covenants, our creditors could declare a
default under our revolving credit facility or senior notes and our indebtedness could be declared
immediately due and payable. Our ability to comply with the provisions of our indebtedness may be
affected by changes in economic or business conditions beyond our control. Further, one of our
strategies is to increase our revenues and profitability and expand our business through acquisitions. We
may require capital in excess of our available cash and the unused portion of our revolving credit
facility to make large acquisitions, which we would generally obtain from access to the credit markets.
There can be no assurance that if a large acquisition is identified that we would have access to
sufficient capital to complete such acquisition. Should we require additional debt financing above our
existing credit limit, we cannot be assured such financing would be available to us or available to us on
reasonable economic terms.
One of our stockholders can exercise substantial influence over our Company.
Our Class B common stock entitles its holders to ten votes for each share and our Class A
common stock entitles its holders to one vote per share. As of January 31, 2014, Timothy P. Horne
beneficially owned approximately 18.4% of our outstanding shares of Class A common stock (assuming
conversion of all shares of Class B common stock beneficially owned by Mr. Horne into Class A
common stock) and approximately 99.2% of our outstanding shares of Class B common stock, which
represents approximately 68.8% of the total outstanding voting power. As long as Mr. Horne controls
shares representing at least a majority of the total voting power of our outstanding stock, Mr. Horne
will be able to unilaterally determine the outcome of most stockholder votes, and other stockholders
will not be able to affect the outcome of any such votes.
Conversion and sale of a significant number of shares of our Class B common stock could adversely affect the
market price of our Class A common stock.
As of January 31, 2014, there were outstanding 28,734,210 shares of our Class A common stock
and 6,489,290 shares of our Class B common stock. Shares of our Class B common stock may be
converted into Class A common stock at any time on a one for one basis. Under the terms of a
registration rights agreement with respect to outstanding shares of our Class B common stock, the
17
holders of our Class B common stock have rights with respect to the registration of the underlying
Class A common stock. Under these registration rights, the holders of Class B common stock may
require, on up to two occasions that we register their shares for public resale. If we are eligible to use
Form S-3 or a similar short-form registration statement, the holders of Class B common stock may
require that we register their shares for public resale up to two times per year. If we elect to register
any shares of Class A common stock for any public offering, the holders of Class B common stock are
entitled to include shares of Class A common stock into which such shares of Class B common stock
may be converted in such registration. However, we may reduce the number of shares proposed to be
registered in view of market conditions. We will pay all expenses in connection with any registration,
other than underwriting discounts and commissions. If all of the available registered shares are sold
into the public market the trading price of our Class A common stock could decline.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
18
Item 2. PROPERTIES.
As of December 31, 2013, we maintained 31 principal manufacturing, warehouse and distribution
centers worldwide, including our corporate headquarters located in North Andover, Massachusetts.
Additionally, we maintain numerous sales offices and other smaller manufacturing facilities and
warehouses. The principal properties in each of our three geographic segments and their location,
principal use and ownership status are set forth below:
Americas:
Location
Principal Use
Owned/Leased
North Andover, MA . . . . . . . . . . . . . . . Corporate Headquarters
Burlington, ON, Canada . . . . . . . . . . . . . Distribution Center
Chesnee, SC . . . . . . . . . . . . . . . . . . . . . Manufacturing
Export, PA . . . . . . . . . . . . . . . . . . . . . . Manufacturing
Franklin, NH . . . . . . . . . . . . . . . . . . . . . Manufacturing/Distribution
Kansas City, KS . . . . . . . . . . . . . . . . . . . Manufacturing
St. Pauls, NC . . . . . . . . . . . . . . . . . . . . . Manufacturing
San Antonio, TX . . . . . . . . . . . . . . . . . . Warehouse/Distribution
Spindale, NC . . . . . . . . . . . . . . . . . . . . . Distribution Center
Kansas City, MO . . . . . . . . . . . . . . . . . . Manufacturing/Distribution
Peoria, AZ . . . . . . . . . . . . . . . . . . . . . . Manufacturing/Distribution
Reno, NV . . . . . . . . . . . . . . . . . . . . . . . Distribution Center
Springfield, MO . . . . . . . . . . . . . . . . . . . Manufacturing/Distribution
Vernon, BC, Canada . . . . . . . . . . . . . . . Manufacturing/Distribution
Woodland, CA . . . . . . . . . . . . . . . . . . . . Manufacturing
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Europe, Middle East and Africa:
Location
Principal Use
Owned/Leased
Eerbeek, Netherlands . . . . . . . . EMEA Headquarters/Manufacturing
Biassono, Italy . . . . . . . . . . . . . Manufacturing/Distribution
Hautvillers, France . . . . . . . . . . Manufacturing
Landau, Germany . . . . . . . . . . Manufacturing/Distribution
Mery, France . . . . . . . . . . . . . . Manufacturing
Plovdiv, Bulgaria . . . . . . . . . . . Manufacturing
Vildbjerg, Denmark . . . . . . . . . Manufacturing/Distribution
Virey-le-Grand, France . . . . . . . Manufacturing/Distribution
Gardolo, Italy . . . . . . . . . . . . . Manufacturing
Monastir, Tunisia . . . . . . . . . . . Manufacturing
Rosi`eres, France . . . . . . . . . . . Manufacturing/Distribution
Sorgues, France . . . . . . . . . . . . Distribution Center
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Asia Pacific:
Location
Principal Use
Owned/Leased
Shanghai, China . . . . . . . . . . . . . . . . . . . Asia Pacific Headquarters
Ningbo, Beilun District, China . . . . . . . . . Distribution Center
Ningbo, Beilun, China . . . . . . . . . . . . . . . Manufacturing
Taizhou, Yuhuan, China . . . . . . . . . . . . . . Manufacturing
Leased
Leased
Owned
Owned
19
Certain of our facilities are subject to mortgages and collateral assignments under loan agreements
with long-term lenders. In general, we believe that our properties, including machinery, tools and
equipment, are in good condition, well maintained and adequate and suitable for their intended uses.
Item 3. LEGAL PROCEEDINGS.
We are from time to time involved in various legal and administrative proceedings. See Item 1.
‘‘Business—Product Liability, Environmental and Other Litigation Matters,’’ and Note 14 of the Notes
to Consolidated Financial Statements, both of which are incorporated herein by reference.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
20
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The following table sets forth the high and low sales prices of our Class A common stock on the
New York Stock Exchange during 2013 and 2012 and cash dividends paid per share.
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
High
$50.04
48.32
58.18
62.66
2013
Low
$42.63
43.12
45.73
52.33
Dividend
High
$0.11
0.13
0.13
0.13
$42.38
41.59
40.29
43.39
2012
Low
$34.97
31.61
30.88
36.45
Dividend
$0.11
0.11
0.11
0.11
There is no established public trading market for our Class B common stock, which is held by
members of the Horne family. The principal holders of such stock are subject to restrictions on transfer
with respect to their shares. Each share of our Class B common stock (10 votes per share) is
convertible into one share of Class A common stock (1 vote per share).
On February 18, 2014, we declared a quarterly dividend of thirteen cents ($0.13) per share on each
outstanding share of Class A common stock and Class B common stock.
Aggregate common stock dividend payments in 2013 were $17.7 million, which consisted of
$14.4 million and $3.3 million for Class A shares and Class B shares, respectively. Aggregate common
stock dividend payments in 2012 were $16.0 million, which consisted of $13.0 million and $3.0 million
for Class A shares and Class B shares, respectively. While we presently intend to continue to pay
comparable cash dividends, the payment of future cash dividends depends upon the Board of Directors’
assessment of our earnings, financial condition, capital requirements and other factors.
The number of record holders of our Class A common stock as of January 31, 2014 was 199. The
number of record holders of our Class B common stock as of January 31, 2014 was 8.
We satisfy the minimum withholding tax obligation due upon the vesting of shares of restricted
stock and the conversion of restricted stock units into shares of Class A common stock by automatically
withholding from the shares being issued a number of shares with an aggregate fair market value on
the date of such vesting or conversion that would satisfy the withholding amount due.
The following table includes information with respect to shares of our Class A common stock
withheld to satisfy withholding tax obligations during the quarter ended December 31, 2013.
Period
Issuer Purchases of Equity Securities
(a) Total
Number of
Shares (or
Units)
Purchased
(b) Average
Price Paid per
Share (or Unit)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
September 30, 2013 - October 27,
2013 . . . . . . . . . . . . . . . . . . . .
October 28, 2013 - November 24,
2013 . . . . . . . . . . . . . . . . . . . .
November 25, 2013 -
December 31, 2013 . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
—
—
1,383
1,383
—
—
—
—
—
—
—
—
—
—
$58.16
$58.16
21
The following table includes information with respect to repurchases of our Class A common stock
during the three-month period ended December 31, 2013 under our stock repurchase program.
Issuer Purchases of Equity Securities
(a) Total
Number of
Shares (or
Units)
Purchased(1)
(b) Average
Price Paid
per Share
(or Unit)
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
Period
September 30, 2013 -
October 27, 2013 . . . . . . . . .
17,631
$55.22
October 28, 2013 -
November 24, 2013 . . . . . . .
18,445
$58.15
November 25, 2013 -
December 31, 2013 . . . . . . .
Total
. . . . . . . . . . . . . . . . . . .
16,050
52,126
$59.33
$57.53
17,631
18,445
16,050
52,126
$69,036,487
$67,963,822
$67,011,512
$67,011,512
(1) On April 30, 2013, the Board of Directors authorized a stock repurchase program of up to
$90 million of the Company’s Class A common stock to be purchased from time to time on the
open market or in privately negotiated transactions. The timing and number of any shares
repurchased will be determined by the Company’s management based on its evaluation of market
conditions. During the quarter ended December 31, 2013, we repurchased approximately
$3.0 million of common stock.
22
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our Class A
common stock for the last five years with the cumulative return of companies on the Standard & Poor’s
500 Stock Index and the Russell 2000 Index. We chose the Russell 2000 Index because it represents
companies with a market capitalization similar to that of Watts Water. The graph assumes that the
value of the investment in our Class A common stock and each index was $100 at December 31, 2008
and that all dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Watts Water Technologies, Inc., the S&P 500 Index
and the Russell 2000 Index
$300
$250
$200
$150
$100
$50
$0
12/08
12/09
12/10
12/11
12/12
12/13
Watts Water Technologies, Inc.
S&P 500
Russell 2000
25FEB201410560884
*
$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending
December 31.
Cumulative Total Return
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Watts Water Technologies, Inc . . . . . . . . . . . . . .
S & P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
126.13
126.46
127.17
151.37
145.51
161.32
143.42
148.59
154.59
182.38
172.37
179.86
265.05
228.19
249.69
The above Performance Graph and related information shall not be deemed ‘‘soliciting material’’ or to
be ‘‘filed’’ with the Securities and Exchange Commission, nor shall such information be incorporated by
reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as
amended, except to the extent that we specifically incorporate it by reference into such filing.
23
Item 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction with our consolidated
financial statements, related Notes thereto and ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’’ included herein.
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in millions, except per share and cash dividend information)
Year Ended
Year Ended
12/31/13(1)(6) 12/31/12(2)(6) 12/31/11(3)(6) 12/31/10(4)(6) 12/31/09(5)(6)
Year Ended
Year Ended
Year Ended
Statement of operations data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations . . .
Loss from discontinued operations, net of
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
DILUTED EPS
Income (loss) per share:
Continuing operations . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share
Balance sheet data (at year end):
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . . . .
$1,473.5
60.9
$1,427.4
70.4
$1,407.4
77.2
$1,264.0
64.1
$1,225.9
41.0
(2.3)
58.6
(2.0)
68.4
(10.8)
66.4
(5.3)
58.8
(23.6)
17.4
1.71
(0.07)
1.65
0.50
$
1.95
(0.05)
1.90
0.44
$
2.06
(0.28)
1.78
0.44
$
1.71
(0.14)
1.57
0.44
$
1.10
(0.63)
0.47
0.44
$
$1,740.2
305.5
$1,709.0
307.5
$1,694.0
397.4
$1,646.1
378.0
$1,599.2
304.0
(1) For the year ended December 31, 2013, net income from continuing operations includes the
following net pre-tax costs: legal costs of $15.3 million, restructuring charges of $8.7 million,
goodwill and other long-lived asset impairment of $2.3 million (of which $1.1 million is recorded in
cost of goods sold), EMEA transformation deployment costs of $1.2 million, earn-out adjustments
of $0.9 million, acceleration of executive share based compensation expense of $0.9 million and an
adjustment to the disposal of the business related to the sale of Tianjin Watts Valve Company Ltd.
(TWVC) of $0.6 million. The net after-tax cost of these items was $18.3 million.
(2) For the year ended December 31, 2012, net income from continuing operations includes the
following net pre-tax costs: restructuring charges of $5.2 million, goodwill and other long-lived
asset impairment of $3.4 million, net legal and customs costs of $2.5 million, an adjustment to the
gain on sale of TWVC of $1.6 million, retention charges related to our former Chief Financial
Officer of $1.6 million, and a charge of $0.4 million for costs related to the 2012 acquisition of
tekmar, offset by a pre-tax gain for an earn-out adjustment of $1.0 million. Additionally, net
income includes tax benefits totaling $0.7 million, primarily related to a tax law change in Italy.
The net after-tax cost of these items was $8.1 million.
(3) For the year ended December 31, 2011, net income from continuing operations includes the
following net pre-tax costs: restructuring charges of $10.0 million, goodwill and other long-lived
asset impairment charges of $2.6 million, pension curtailment charges of $1.5 million, separation
costs related to our former Chief Executive Officer of $6.3 million, and costs related to our
acquisition of Danfoss Socla S.A.S (Socla) in France of $5.8 million offset by pre-tax gains of
$1.2 million for an earn-out adjustment, $7.7 million related to the sale of TWVC in China and
$1.1 million from legal settlements. Additionally, net income includes a tax benefit of $4.2 million
relating to the sale of TWVC offset by a $1.1 million tax charge in EMEA related to our France
restructuring. The net after-tax cost of these items was $5.7 million. Included in loss from
24
discontinued operations is goodwill and other long-lived asset impairment charges of $14.8 million
related to Austroflex, see (6).
(4) For the year ended December 31, 2010, net income from continuing operations includes the
following net pre-tax costs: restructuring charges of $14.1 million, intangible impairment charges of
$1.4 million, and costs related to acquisitions and other items of $7.1 million offset by pre-tax gains
of $4.5 million primarily for product liability and workers compensation accrual adjustments.
Additionally, net income includes a tax benefit of $4.3 million related to the release of a valuation
allowance in EMEA offset by a tax charge of $1.5 million relating to the repatriation of earnings
recognized upon our decision to dispose of a China subsidiary. The net after-tax cost of these
items was $10.3 million.
(5) For the year ended December 31, 2009, net income includes the following net pre-tax costs:
restructuring charges of $18.9 million and intangible impairment charges of $3.3 million, offset by
pre-tax gains on the sale of Tianjin Tanggu Watts Valve Co. Ltd. (TWT) in China of $1.1 million,
favorable product liability and workers compensation accrual adjustments of $4.9 million and legal
settlements of $1.5 million. Additionally, net income includes a tax charge of $3.9 million relating
to previously realized tax benefits, which were expected to be recaptured as a result of our decision
to restructure our operations in China. The net after-tax cost of these items was $16.7 million.
(6) In August 2013, we disposed of the stock of Austroflex. Results from operations and a loss on
disposal are recorded in discontinued operations for 2013, 2012, 2011 and 2010. In December
2012, we disposed of the stock of Flomatic Corporation. Results from operations and a loss on
disposal are recorded in discontinued operations for 2012 and 2011. In January 2010, we disposed
of our investment in CWV. Results from operation and estimated loss on disposal are included net
of tax for CWV in discontinued operations for 2010 and 2009. In May 2009, the Company
liquidated its TEAM Precision Pipework, Ltd. (TEAM) business. Results from operation and loss
on disposal are included net of tax from the deconsolidation of TEAM in discontinued operations
for 2011, 2010 and 2009. In September 1996, we divested our Municipal Water Group of
businesses, which included Henry Pratt, James Jones Company and Edward Barber and
Company Ltd. Costs and expenses related to the Municipal Water Group, for 2011, 2010 and 2009
relate to legal and settlement costs associated with the James Jones Litigation and other
miscellaneous costs. Discontinued operating loss for 2011 and 2010 include an estimated settlement
reserve adjustment in connection with the FCPA investigation at CWV (see Note 3) and in 2010
and 2009, includes legal costs associated with the FCPA investigation.
25
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
We are a leading supplier of products for use in the water quality, water safety, water flow control
and water conservation markets in both the Americas and EMEA with a growing presence in Asia
Pacific. For over 139 years, we have designed and manufactured products that promote the comfort and
safety of people and the quality and conservation of water used in commercial and residential
applications. We earn revenue and income almost exclusively from the sale of our products. Our
principal product lines include:
(cid:129) Residential & commercial flow control products—includes products typically sold into plumbing
and hot water applications such as backflow preventers, water pressure regulators, temperature
and pressure relief valves, and thermostatic mixing valves.
(cid:129) HVAC & gas products—includes hydronic and electric heating systems for under-floor radiant
applications, hydronic pump groups for boiler manufacturers and alternative energy control
packages, and flexible stainless steel connectors for natural and liquid propane gas in
commercial food service and residential applications. HVAC is an acronym for heating,
ventilation and air conditioning.
(cid:129) Drains & water re-use products—includes drainage products and engineered rain water
harvesting solutions for commercial, industrial, marine and residential applications.
(cid:129) Water quality products—includes point-of-use and point-of-entry water filtration, conditioning
and scale prevention systems for both commercial and residential applications.
Our business is reported in three geographic segments: Americas, EMEA and Asia Pacific. We
distribute our products through three primary distribution channels: wholesale, do-it-yourself (DIY) and
original equipment manufacturers (OEMs).
We believe that the factors relating to our future growth include our ability to continue to make
selective acquisitions, both in our core markets as well as in new complementary markets; regulatory
requirements relating to the quality and conservation of water and the safe use of water; increased
demand for clean water; continued enforcement of plumbing and building codes; and a healthy
economic environment. We have completed 36 acquisitions since 1999. Our acquisition strategy focuses
on businesses that manufacture preferred brand name products that address our themes of water
quality, water conservation, water safety and water flow control and related complementary markets.
We target businesses that will provide us with one or more of the following: an entry into new markets,
an increase in shelf space with existing customers, a new or improved technology or an expansion of
the breadth of our water quality, water conservation, water safety and water flow control products for
the commercial, industrial and residential markets.
Products representing a majority of our sales are subject to regulatory standards and code
enforcement, which typically require that these products meet stringent performance criteria. Together
with our commissioned manufacturers’ representatives, we have consistently advocated for the
development and enforcement of such plumbing codes. We are focused on maintaining stringent quality
control and testing procedures at each of our manufacturing facilities in order to manufacture products
in compliance with code requirements and take advantage of the resulting demand for compliant
products. We believe that the product development, product testing capability and investment in plant
and equipment needed to manufacture products in compliance with code requirements, represent a
competitive advantage for us.
Our performance in 2013 varied, driven by different economic and business dynamics within each
region in which we participate. In the Americas, we saw sequential growth during 2013 as the U.S.
residential new construction marketplace continued to recover and the repair and replace end market
remained strong. Although we experienced minimal growth in the new commercial construction market,
26
there have been recent positive macroeconomic signs that a recovery is forthcoming. In EMEA, a weak
pan European economy negatively impacted our sales. Certain parts of Europe, such as Italy France
and Germany, remained affected by the general economic downturn. However, we were able to
partially mitigate the effect of the sales volume reduction with productivity initiatives and cost
reduction initiatives. Our EMEA segment continued to expand its sales into Eastern Europe during the
year. In Asia Pacific, we had solid growth as we expanded our sales and marketing efforts.
Overall, sales grew organically by 2.1% as compared to 2012. Organic sales growth excludes the
impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. We believe
this provides investors with a more complete understanding of underlying sales trends by providing
sales growth on a consistent basis. Compared to 2012, organic sales in Americas and Asia Pacific grew
by 5.5% and 20.5%, respectively, but were offset by a reduction in EMEA organic sales of 3.6%.
Operationally, in the U.S. we continued our focus around our transition to lead free production. In
2013 and 2012, we committed an aggregate of approximately $18.3 million in capital spending for a new
foundry and machinery in the U.S. to meet expected lead free demand for our products sold in the
U.S. Construction of the new foundry was completed during the second quarter of 2013. We incurred
$5.8 million in transition costs in 2013 relating to inefficiencies experienced as part of the lead free
conversion project, including furnace repairs, excess scrap and consulting costs related to the new
foundry. The impact of commodity costs during 2013 was minimal, especially with our most important
raw material, copper. We saw copper spot prices in the first quarter trending higher, with prices
declining to a consistent level through the remainder of the year. Pricing, in turn, was fairly stable,
although we experienced some pricing pressures in certain geographies and in certain product lines in
the Americas, especially in the DIY channel. In EMEA, we were able to selectively increase pricing for
certain products. However, we believe the economic uncertainty in Europe may continue affecting how
we and our competitors are pricing in end markets.
We continually review our business and implement restructuring plans as needed. The restructuring
program for EMEA that we announced in July 2013 is proceeding in accordance with our expectations.
Please see Note 4 of the Notes to Consolidated Financial Statements for a more detailed explanation
of our restructuring activities.
In the fourth quarter of 2013, we began a program that we refer to as the European
transformation. This program is designed to refocus our European operations from being country
specific to a pan European business unit operating strategy. Under this initiative, we intend to
(1) develop better sales capabilities through improved product management and enhanced product
cross-selling efforts, (2) drive more efficient European sourcing and logistics, and (3) enhance our focus
on emerging market opportunities. We plan to align our legal and tax structure in accordance with our
business structure and take advantage of favorable tax rates where possible. We expect this project to
be ongoing through 2016. We anticipate total non-recurring external deployment costs of $12.2 million,
with approximately $9.0 million anticipated to be spent in 2014. We incurred approximately $1.2 million
in the fourth quarter of 2013 in deployment costs. Total annual savings are forecasted at $18.0 million
by 2018, with approximately $3.5 million and $10.0 million in annual savings expected in 2014 and 2015,
respectively. We expect that we will need to add approximately $4.0 million of infrastructure costs per
annum to our current operational base by 2018 to maintain the program, of which approximately
$3.5 million will be added in 2014.
Acquisitions and Disposals
On August 1, 2013, the Company completed the sale of all of the outstanding shares of an
indirectly wholly-owned subsidiary, Austroflex, receiving net cash proceeds of $7.9 million. Austroflex is
an Austrian-based manufacturer of pre-insulated flexible pipe systems for district heating, solar
applications and under-floor radiant heating systems. Austroflex did not meet performance expectations
since its purchase in 2010. The loss after tax on disposal of the business was approximately $2.2 million.
Further, during the year ended December 31, 2011, the Company wrote down Austroflex’s long-lived
27
assets by $14.8 million. The Company will not have a substantial continuing involvement in Austroflex’s
operations and cash flows, therefore Austroflex’s results of operations have been presented as
discontinued operations and all comparative periods presented have been adjusted in the consolidated
financial statements to reflect Austroflex’s results as discontinued operations. Please see Note 3 of the
Notes to Consolidated Financial Statements for additional information regarding operating results of
Austroflex.
On December 21, 2012, we disposed of the outstanding shares of Flomatic Corporation (Flomatic),
to a third party in an all cash transaction. Flomatic was acquired as part of the Danfoss Socla S.A.S.
(Socla) acquisition in April 2011. Flomatic specializes in manufacturing various valves for the well water
industry, a product line not core to our business. The operating results of Flomatic have been classified
in discontinued operations for 2012 and 2011. A net loss on disposal of approximately $3.8 million was
charged to discontinued operations in 2012.
On January 31, 2012, we completed the acquisition of tekmar Control Systems (tekmar) in a share
purchase transaction. A designer and manufacturer of control systems used in heating, ventilation, and
air conditioning applications; tekmar is expected to enhance our hydronic systems product offerings in
the U.S. and Canada. The initial purchase price paid was CAD $18.0 million, with an earn-out based
on future earnings levels being achieved. The initial purchase price paid was equal to approximately
$17.8 million based on the exchange rate of Canadian dollar to U.S. dollars as of January 31, 2012. In
2012, a contingent liability of $5.1 million was recognized as the estimate of the acquisition date fair
value of the earn-out. A portion of the contingent consideration was paid out during 2013, in the
amount of $1.2 million, based on performance metrics achieved in 2012. The contingent liability was
increased by $1.0 million during the year ended 2013 based on performance metrics achieved or
expected to be achieved. The total purchase price will not exceed CAD $26.2 million.
Recent Developments
On January 9, 2014, David J. Coghlan resigned from his positions as Chief Executive Officer,
President and Director of the Company and our Board of Directors appointed Dean P. Freeman, our
Executive Vice President and Chief Financial Officer, to serve as interim Chief Executive Officer and
President of the Company. The Company’s Board of Directors has initiated a search for the Company’s
next Chief Executive Officer and President
On February 18, 2014, we declared a quarterly dividend of thirteen cents ($0.13) per share on each
outstanding share of Class A common stock and Class B common stock.
On February 18, 2014, we entered into a new Credit Agreement (the ‘‘New Credit Agreement’’)
among the Company, certain of our subsidiaries who become borrowers under the New Credit
Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of
Credit Issuer, and the other lenders referred to therein. The New Credit Agreement provides for a
$500 million, five-year, senior unsecured revolving credit facility which may be increased by an
additional $500 million under certain circumstances and subject to the terms of the New Credit
Agreement. The New Credit Agreement has a sublimit of up to $100 million in letters of credit. We
expect to use any borrowings under the New Credit Agreement for general corporate purposes,
acquisitions and the repayment of existing debt.
In connection with the execution and delivery of the New Credit Agreement, all outstanding
amounts owing under our prior Credit Agreement (the ‘‘Prior Credit Agreement’’), dated as of
June 18, 2010, among the Company, certain subsidiaries of the Company as borrowers, Bank of
America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other
lenders referred to therein, were repaid in full and the Prior Credit Agreement was terminated.
28
Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net Sales. Our business is reported in three geographic segments: Americas, EMEA and Asia
Pacific. Our net sales in each of these segments for the years ended December 31, 2013 and 2012 were
as follows:
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Net Sales
% Sales
Net Sales
% Sales
Change
% Change to
Consolidated
Net Sales
(Dollars in millions)
Americas . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . .
$ 878.5
562.2
32.8
59.6% $ 835.0
38.2
565.6
2.2
26.8
58.5% $43.5
(3.4)
39.6
6.0
1.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,473.5
100.0% $1,427.4
100.0% $46.1
3.0%
(0.2)
0.4
3.2%
The change in net sales was attributable to the following:
Americas EMEA Pacific Total Americas EMEA Pacific Total Americas EMEA
Asia
Asia
Asia
Pacific
Change as a %
of Consolidated Net Sales
Change as a %
of Segment Net Sales
Organic . . . . . . . . . . . .
Foreign exchange . . . . .
Acquisitions . . . . . . . . .
$45.6
(2.8)
0.7
$(20.5) $5.5 $30.6
14.8
0.5
— — 0.7
17.1
(Dollars in millions)
3.1% (1.4)% 0.4% 2.1% 5.4% (3.6)% 20.5%
(0.2)
0.1
1.2 — 1.0
— — 0.1
(0.3)
0.1
1.9
—
3.0
—
Total . . . . . . . . . . . . . .
$43.5
$ (3.4) $6.0 $46.1
3.0% (0.2)% 0.4% 3.2% 5.2% (0.6)% 22.4%
Organic net sales in 2013 in the Americas wholesale market increased by $37.0 million, or 6.3%,
compared to 2012 mainly from increased sales in residential and commercial flow product lines and
from our customers continuing to transition to lead free products. Organic sales into the Americas DIY
market in 2013 increased $4.8 million, or 2.7%, compared to 2012, primarily due to increased product
sales of $1.9 million in residential and commercial flow control products and $1.2 million in water
quality products. Unit sales increases were substantially offset by competitive pricing in the DIY
market.
Organic net sales in the EMEA wholesale market decreased by $10.7 million, or 3.7%, compared
to 2012 primarily due to the economic market conditions in France and Germany. Organic net sales
into the EMEA OEM market decreased by $6.0 million, or 2.3%, as compared to 2012 primarily due
to a slower HVAC market in Germany and fewer large project sales in the drains business, offset by
increased sales in the electronics business.
The net increase in sales due to foreign exchange was primarily due to the appreciation of the
euro against the U.S. dollar. We cannot predict whether these currencies will appreciate or depreciate
against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have
a positive or negative impact on our net sales.
Acquired net sales growth in Americas was due to tekmar.
29
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2013 and
2012 were as follows:
Year Ended
December 31,
2013
2012
(Dollars in millions)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$526.5
35.7%
$513.5
36.0%
In Americas, gross margin decreased primarily due to inefficiencies related to our lead free
transition program and retail pricing pressure offset partially by product mix and volume growth.
EMEA gross margin increased slightly as compared to 2012, primarily due to production efficiencies
driven from ongoing restructuring programs offsetting lower overhead absorption related to reduced
manufacturing volumes.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or
SG&A expenses, for 2013 increased $24.7 million, or 6.5%, compared to 2012. The increase in SG&A
expenses was attributable to the following:
Organic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.8
3.6
0.3
$24.7
5.5%
0.9
0.1
6.5%
(in millions) % Change
The net organic increase in SG&A is primarily attributable to increased legal costs of
$12.5 million, increased product liability cost of $4.5 million, increased freight and commission costs of
$4.1 million associated with increased sales, and increased personnel costs of $2.2 million, offset by
lower depreciation and amortization of $1.6 million and lower advertising costs of $1.3 million.
Incremental legal costs include the impact of an agreement in principle to settle all claims in the
Trabakoolas et al., v. Watts Water Technologies, Inc., et al., matter pending in the United States District
Court for the Northern District of California. The net settlement charged to operations amounted to
$13.6 million in 2013. Refer to Note 14 of the Notes to Consolidated Financial Statements in this
Annual Report on Form 10-K for more detail. Increased product liability cost of $4.5 million in the
Americas is based on a third-party actuarial analysis that incorporated higher reported claims in 2013
offset to some extent by the impact of the Trabakoolas settlement. Increased personnel costs primarily
relate to investments in new positions and increased stock incentive plan costs.
The increase in SG&A expenses from foreign exchange was primarily due to the appreciation of
the Euro against the U.S. dollar. Acquired SG&A expenses related to the tekmar acquisition. Total
SG&A expense, as a percentage of sales, was 27.5% in 2013 and 26.7% in 2012.
Restructuring and Other Charges.
In 2013, we recorded a net charge of $8.7 million primarily for
severance and other costs incurred as part of our previously announced restructuring programs, as
compared to $4.2 million for 2012. For a more detailed description of our current restructuring plans,
see Note 4 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
(Gain On) Adjustment to Disposal of Business.
In 2011, we booked a net gain of approximately
$7.7 million relating primarily to the recognition of currency translation adjustments resulting from the
sale of TWVC. In 2012 and 2013, we recorded adjustments to decrease the gain on disposal by
$1.6 million and increase the gain on disposal by $0.6 million, respectively.
Goodwill and Other Long-Lived Asset Impairment Charges.
In 2013, we recorded asset impairment
charges of $1.2 million, primarily relating to a $0.3 million goodwill impairment charge for BRAE, and
30
trade name impairment charges of $0.3 million and $0.4 million for the Americas and EMEA,
respectively. The goodwill impairment was based on historical results being below our expectations and
a reduction in the expected future cash flows to be generated by BRAE. See the results of operations
discussion for the year ended December 31, 2012 compared to the year ended December 31, 2011, for
details of the 2012 goodwill and other long-lived asset impairment charges. See also Note 2 of Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K, for additional information
regarding these impairments.
Operating Income. Operating income by geographic segment for 2013 and 2012 was as follows:
Year Ended
December 31,
2013
December 31,
2012
Change
% Change to
Consolidated
Operating
Income
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 90.4
46.9
9.7
(35.5)
$111.5
(Dollars in millions)
$ 96.5
52.5
6.5
(32.2)
$ (6.1)
(5.6)
3.2
(3.3)
$123.3
$(11.8)
(4.9)%
(4.6)
2.6
(2.7)
(9.6)%
The change in operating income was attributable to the following:
Americas EMEA Pacific Corp. Total Americas EMEA Pacific Corp. Total Americas EMEA Pacific Corp.
Asia
Asia
Asia
(Dollars in millions)
Change as a % of
Consolidated Operating Income
Change as a % of
Segment Operating Income
Organic . . . . . . . . . .
Foreign exchange . . . .
Acquisitions
. . . . . . .
Restructuring,
impairment charges
and other
. . . . . . .
$(7.3)
(0.6)
0.1
$(2.4)
1.8
—
$0.9
0.1
—
$(3.3) $(12.1)
1.3
0.1
—
—
(5.9)% (2.0)% 0.7% (2.7)%(9.9)% (7.5)% (4.6)% 13.9% 10.2%
(0.5)
0.1
— 1.1
— 0.1
(0.6)
0.1
0.1
—
3.4
—
1.5
—
1.5
—
—
—
1.7
(5.0)
2.2
— (1.1)
1.4
(4.1)
1.8
— (0.9)
1.7
(9.5)
33.8
—
Total . . . . . . . . . . . .
$(6.1)
$(5.6)
$3.2
$(3.3) $(11.8)
(4.9)% (4.6)% 2.6% (2.7)%(9.6)% (6.3)% (10.7)% 49.2% 10.2%
The decrease in consolidated organic operating income was due primarily to an increase in SG&A
expenses, as previously discussed. Acquired operating income relates to the tekmar acquisition.
The increase in restructuring, impairment charges and other from 2013 to 2012 is primarily driven
by the EMEA restructuring programs, as previously discussed.
The net increase in operating income from foreign exchange was primarily due to the appreciation
of the euro against the U.S. dollar. We cannot predict whether the euro will appreciate or depreciate
against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have
a positive or negative impact on our operating income.
Interest Expense.
Interest expense decreased $3.1 million, or 12.6%, in 2013 compared to 2012,
primarily due to the retirement in mid-May 2013 of $75 million in unsecured senior notes and to a
lower balance outstanding on our stand-by letters of credit. See Note 10 of Notes to Consolidated
Financial Statements in this Annual Report on Form 10-K, for additional information regarding
financing arrangements.
Other Expense (Income), Net. Other expense (income), net increased $3.6 million in 2013
compared to 2012, primarily due to a foreign currency transaction losses in the Americas, EMEA and
Asia Pacific as a result of the appreciation of the Chinese yuan and the euro against the U.S. dollar
and appreciation of the U.S. dollar against the Canadian dollar in 2013. In addition, a favorable
customs settlement recorded in 2012 did not repeat in 2013.
31
Income Taxes. Our effective tax rate for continuing operations increased to 30.6% in 2013 from
29.7% in 2012. The 2013 rate is up slightly due to a change in tax laws in France that limited
intercompany interest deductions. In 2012, the rate was favorably impacted by the release of a tax
reserve following the completion of a European tax audit.
Net Income From Continuing Operations. Net income from continuing operations for 2013 was
$60.9 million, or $1.71 per common share, compared to $70.4 million, or $1.95 per common share, for
2012. Results for 2013 include net after-tax charges of $18.3 million, or $0.51 per common share,
including legal settlement charges of $0.26, restructuring and other net charges of $0.17, goodwill and
other long-lived asset impairments of $0.04, earnout adjustments of $0.02 and EMEA transformation
deployment costs of $0.02.
Results for 2012 include net after-tax charges of $8.1 million, or $0.22 per common share,
including restructuring and other net charges of $0.07, goodwill and other long-lived asset impairments
of $0.07, a charge to adjust the TWVC gain of $0.04, retention costs for our former Chief Financial
Officer of $0.03, net legal/customs settlement charges of $0.02, and other net credits of $0.01, primarily
related to a favorable tax adjustment due to a change in 2012 in Italian tax rules.
The appreciation primarily of the euro against the U.S. dollar in 2013 resulted in a positive impact
on our operations of $0.03 per common share compared to 2012. We cannot predict whether the euro,
Canadian dollar or Chinese yuan will appreciate or depreciate against the U.S. dollar in future periods
or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net
income.
Loss From Discontinued Operations. Loss from discontinued operations in 2013 of $2.3 million, or
($0.07) per common share, was related to the operations and loss on disposal of Austroflex. See Note 3
of Notes to Consolidated Financial Statements.
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net Sales. Our business is reported in three geographic segments: Americas, EMEA and Asia
Pacific. Our net sales in each of these segments for the years ended December 31, 2012 and 2011 were
as follows:
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Net Sales
% Sales
Net Sales
% Sales
Change
% Change to
Consolidated
Net Sales
(Dollars in millions)
Americas . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . .
$ 835.0
565.6
26.8
58.5% $ 810.9
39.6
574.8
1.9
21.7
57.6% $24.1
(9.2)
40.9
5.1
1.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,427.4
100.0% $1,407.4
100.0% $20.0
1.7%
(0.7)
0.4
1.4%
The change in net sales was attributable to the following:
Change As a %
of Consolidated Net Sales
Change As a %
of Segment Net Sales
Asia
Americas EMEA Pacific Total Americas EMEA Pacific Total Americas EMEA Pacific
Asia
Asia
Organic . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . .
Acquisitions . . . . . . . . . . . . .
$15.2
(0.8)
9.7
$ (8.0)
(42.3)
41.1
$3.9
0.5
0.7
$ 11.1
(42.6)
51.5
(Dollars in millions)
1.1% (0.6)% 0.3% 0.8% 1.9% (1.4)% 18.0%
—
0.6
— (3.0)
3.6
0.1
(0.1)
1.2
(3.0)
2.9
(7.3)
7.1
2.3
3.2
Total . . . . . . . . . . . . . . . . . .
$24.1
$ (9.2)
$5.1
$ 20.0
1.7% (0.7)% 0.4% 1.4% 3.0% (1.6)% 23.5%
32
Organic net sales in 2012 into the Americas wholesale market increased by $4.0 million, or 0.6%,
compared to 2011. Minimal increases were noted in our four major product categories ranging from
0.2% in water quality products to 2.0% in HVAC and gas products. Organic sales into the Americas
DIY market in 2012 increased $11.2 million, or 6.9%, compared to 2011, primarily due to increased
product sales of $8.5 million in residential and commercial flow control products and $2.1 million in
water quality products.
Organic net sales in the EMEA wholesale market were essentially flat compared to 2011.
Wholesale sales increased $5.7 million due to stronger plumbing and valves sales into the Middle East
and Eastern Europe, and increased drain sales on a pan European basis by $1.0 million. However,
those gains were offset by wholesale sales reductions of $3.5 million in Italy and $2.1 million in France,
both due to a poor overall economy, and a reduction of pre-insulated pipe products sales of
$2.1 million. Organic sales into the OEM market in 2012 decreased by $6.0 million compared to 2011.
The decline was primarily due to decreased sales in the Nordic region of $6.2 million from lower
demands by heating pump and electrical heating manufacturers, lower sales in France and Italy of
$3.5 million and $1.4 million, respectively, due to the economic slowdown. Declines were offset by
increased sales of $8.4 million related to our drains product line.
The net decrease in sales due to foreign exchange was primarily due to the depreciation of the
Euro and the Canadian dollar against the U.S. dollar. We cannot predict whether these currencies will
appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange
rate fluctuations will have a positive or negative impact on our net sales.
Acquired net sales in EMEA and Asia Pacific related to the Socla acquisition and in the Americas
were due to tekmar.
Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2012 and
2011 were as follows:
Year Ended
December 31,
2012
2011
(Dollars in millions)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$513.5
36.0%
$508.4
36.1%
Consolidated gross margin was fairly stable in 2012 compared to 2011, but varied by geography. In
Americas, gross margin declined due to non-commodity cost increases as well as manufacturing
inefficiencies driven by pre-production costs and outsourcing costs caused by certain U.S. plants
transitioning to lead free production. Americas gross margin was also affected by product mix as DIY
sales grew faster than wholesale sales and there were selective price concessions to meet market
competition. Americas gross margin increased during the second half of 2012 as lead free related costs
abated. EMEA gross margin increased as compared to 2011, partially due to acquisition accounting
charges of $4.7 million made in 2011 in connection with the Socla acquisition and partially due to
better product mix and improved pricing in 2012.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or
SG&A expenses, for 2012 increased $9.5 million, or 2.6%, compared to 2011. The increase in SG&A
expenses was attributable to the following:
Organic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.3
(10.1)
16.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.5
0.9%
(2.7)
4.4
2.6%
(in millions) % Change
33
The net organic increase in SG&A is primarily attributable to increases in professional services of
$6.4 million, insurance costs of $4.4 million and variable selling and sales related costs of $2.8 million,
offset by lower personnel related costs of $7.7 million, lower depreciation and amortization of
$0.9 million, and a $1.7 million reduction in other expenses. Professional service costs increased due to
higher legal fees and legal settlement costs, and IT and tax related projects undertaken in 2012.
Insurance costs increased due to higher product liability charges in the Americas. Personnel costs were
reduced in 2012 primarily due to the separation costs incurred in 2011 for the former Chief Executive
Officer and lower retirement costs in 2012 related to the 2011 pension freeze.
The decrease in SG&A expenses from foreign exchange was primarily due to the depreciation of
the euro against the U.S. dollar. Acquired SG&A expenses related to the Socla and tekmar
acquisitions. Total SG&A expense, as a percentage of sales, was 26.7% in 2012 and 26.4% in 2011.
Restructuring and Other Charges.
In 2012, we recorded a net charge of $4.2 million primarily for
severance and other costs incurred as part of our previously announced restructuring programs, as
compared to $8.8 million for 2011. For a more detailed description of our current restructuring plans,
see Note 4 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Goodwill and Other Long-Lived Asset Impairment Charges.
In 2012, we recorded asset impairment
charges of $3.4 million, including $1.7 million for impairment charges on long-lived assets in the
Americas that were ultimately sold during 2012, a $1.0 million goodwill impairment charge for BRAE,
a $0.4 million impairment charge for an Americas trade name and $0.3 million for asset write-downs in
Europe. The goodwill impairment was based on historical results being below our expectations and a
reduction in the expected future cash flows to be generated by BRAE. See Note 2 of Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K, for additional information
regarding these impairments.
(Gain On) Adjustment to Disposal of Business.
In 2011, we booked a net gain of approximately
$7.7 million relating primarily to the recognition of currency translation adjustments resulting from the
sale of TWVC. In 2012, we recorded an adjustment of $1.6 million to decrease the gain.
Operating Income. Operating income by geographic segment for 2012 and 2011 was as follows:
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 96.5
52.5
6.5
(32.2)
$123.3
The change in operating income was attributable to the following:
Year Ended
December 31,
2012
December 31,
2011
Change
% Change to
Consolidated
Operating
Income
(11.3)%
5.2
(4.2)
2.7
(Dollars in millions)
$111.6
45.5
12.2
(35.8)
$(15.1)
7.0
(5.7)
3.6
$133.5
$(10.2)
(7.6)%
Asia
Americas EMEA Pacific Corp. Total Americas EMEA Pacific Corp. Total Americas EMEA Pacific
Asia
Asia
Corp.
Change as a % of
Consolidated Operating Income
Change as a % of
Segment Operating Income
$(14.4)
(0.2)
1.5
$ 2.6
(4.4)
3.5
$ 3.4
0.1
—
$3.6
—
—
$ (4.8)
(4.5)
5.0
(Dollars in millions)
(10.8)% 2.0% 2.5% 2.7% (3.6)% (12.9)% 5.7% 27.9% (10.1)%
(0.2)
1.2
(3.3)
2.6
0.1
—
— (3.4)
— 3.8
(0.2)
1.3
(9.6)
7.7
0.8
—
—
—
—
Organic . . . . . . . . .
Foreign exchange . . .
Acquisitions . . . . . .
Restructuring,
impairment charges
. . . . . .
and other
(2.0)
5.3
(9.2) —
(5.9)
(1.5)
3.9
(6.8) — (4.4)
(1.7)
11.6
(75.4)
Total . . . . . . . . . . .
$(15.1)
$ 7.0
$(5.7) $3.6
$(10.2)
(11.3)% 5.2% (4.2)% 2.7% (7.6)% (13.5)% 15.4% (46.7)% (10.1)%
34
The decrease in consolidated organic operating income was due primarily to a reduction in gross
margin in Americas, for reasons previously discussed. Their impact was offset partially by a reduction in
acquisition costs in EMEA related to the 2011 Socla acquisition. Acquired operating income relates to
the Socla and tekmar acquisitions.
The increase in restructuring, impairment charges and other from 2011 to 2012 is primarily driven
by the gain on disposal of business recorded in 2011 which did not repeat in 2012, as previously
discussed, offset primarily by decreased restructuring costs.
The net decrease in operating income from foreign exchange was primarily due to the depreciation
of the euro against the U.S. dollar. We cannot predict whether the euro will appreciate or depreciate
against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have
a positive or negative impact on our operating income.
Interest Expense.
Interest expense decreased $1.2 million, or 4.7%, in 2012 compared to 2011,
primarily due to a decrease in the amounts outstanding under our revolving credit facility that was used
to partially finance the Socla acquisition in 2011. See Note 10 of Notes to Consolidated Financial
Statements in this Annual Report on Form 10-K, for additional information regarding financing
arrangements.
Other Expense (Income), Net. Other expense (income), net decreased $1.6 million in 2012
compared to 2011, primarily due to a reduction in foreign currency transaction losses and a favorable
customs settlement in Asia Pacific in 2012.
Income Taxes. Our effective rate for continuing operations increased to 29.7% in 2012 from
28.5% in 2011. The primary cause of the lower rate in 2011 was the tax benefit realized in connection
with the disposition of our TWVC facility in China. This was partially offset by the release of a tax
reserve in 2012 following the completion of a European tax audit.
Net Income From Continuing Operations. Net income from continuing operations for 2012 was
$70.4 million, or $1.95 per common share, compared to $77.2 million, or $2.06 per common share, for
2011. Results for 2012 include net after-tax charges of $8.1 million, or $0.22 per common share,
including restructuring and other net charges of $0.07, goodwill and other long-lived asset impairments
of $0.07, a charge to adjust the TWVC gain of $0.04, retention costs for our former Chief Financial
Officer of $0.03, net legal/customs settlement charges of $0.02, and other net credits of $0.01, primarily
related to a favorable tax adjustment due to a change in 2012 in Italian tax rules.
Results for 2011 include net after-tax charges of $5.7 million or $0.16 per common share, including
restructuring and other charge of $0.18, acquisition and due diligence costs of $0.12, a charge related to
our former Chief Executive Officer’s separation agreement of $0.11, goodwill and asset impairment
charges of $0.05, a pension curtailment loss of $0.02, offset by a gain on the disposal of TWVC of
$0.30 and other net gains of $0.02 primarily related to earnout and legal adjustments.
The depreciation of the euro and Canadian dollar against the U.S. dollar in 2012 resulted in a
negative impact on our operations of $0.09 per common share compared to 2011. We cannot predict
whether the euro, Canadian dollar or Chinese yuan will appreciate or depreciate against the U.S. dollar
in future periods or whether future foreign exchange rate fluctuations will have a positive or negative
impact on our net income.
Loss From Discontinued Operations. Loss from discontinued operations in 2012 of $2.0 million, or
($0.05) per common share, was related to the operations and disposal of Flomatic and Austroflex. Loss
from discontinued operations in 2011 of $10.8 million, or ($0.28) per common share, was primarily
related to the operating loss of Austroflex. See Note 3 of Notes to Consolidated Financial Statements.
35
Liquidity and Capital Resources
2013 Cash Flows
In 2013, we generated $118.3 million of cash from operating activities as compared to
$130.3 million in 2012. The decrease was primarily due to lower net income and cash used to fund a
lead free inventory increase in the Americas. We generated approximately $92.1 million of free cash
flow (a non-GAAP financial measure, which we reconcile below, defined as net cash provided by
continuing operating activities minus capital expenditures plus proceeds from sale of assets), compared
to free cash flow of $103.0 million in 2012. Free cash flow as a percentage of net income from
continuing operations was 151.2% in 2013 as compared to 146.3% in 2012.
In 2013, we used $24.1 million of net cash for investing activities, including $27.7 million of cash
for capital equipment, offset partially by the proceeds from the sale of buildings and equipment of
$1.5 million. We anticipate investing approximately $27.0 million in capital equipment in 2014 to
improve our manufacturing capabilities.
In 2013, we used $109.5 million of net cash from financing activities. Our most significant cash
outlays included the repayment of the $75.0 million of unsecured senior notes that matured on May 15,
2013, payments to repurchase approximately 454,000 shares of Class A common stock at a cost of
approximately $23.0 million and payment of dividends of $17.7 million, offset by proceeds of
$11.9 million from option exercises under the employee stock plans.
On June 18, 2010, we entered into a credit agreement (the Prior Credit Agreement) among the
Company, certain subsidiaries of the Company who become borrowers under the Prior Credit
Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of credit
issuer, and the other lenders referred to therein. The Prior Credit Agreement provided for a
$300.0 million, five-year, senior unsecured revolving credit facility which could have been increased by
an additional $150.0 million under certain circumstances and subject to the terms of the Prior Credit
Agreement. The Prior Credit Agreement had a sublimit of up to $75.0 million in letters of credit.
Borrowings outstanding under the Prior Credit Agreement bore interest at a fluctuating rate per
annum equal to (1) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR
rate plus an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to our
consolidated leverage ratio plus, in the case of certain lenders, a mandatory cost calculated in
accordance with the terms of the Prior Credit Agreement, or (2) in the case of base rate loans and
swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for
such day as announced by Bank of America, N.A. as its ‘‘prime rate,’’ and (c) the British Bankers
Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%,
determined by reference to our consolidated leverage ratio. In addition to paying interest under the
Prior Credit Agreement, we were also required to pay certain fees in connection with the credit facility,
including, but not limited to, a facility fee and letter of credit fees.
On February 18, 2014, we entered into a new Credit Agreement (the New Credit Agreement)
among the Company, certain subsidiaries of the Company who become borrowers under the Credit
Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of
Credit Issuer, and the other lenders referred to therein. The New Credit Agreement provides for a
$500 million, five-year, senior unsecured revolving credit facility which may be increased by an
additional $500 million under certain circumstances and subject to the terms of the New Credit
Agreement. The New Credit Agreement has a sublimit of up to $100 million in letters of credit. In
connection with our entering into the New Credit Agreement, we terminated the Prior Credit
Agreement.
Borrowings outstanding under the New Credit Agreement bear interest at a fluctuating rate per
annum equal to an applicable percentage equal to (1) in the case of Eurocurrency rate loans, the
British Bankers Association LIBOR rate plus an applicable percentage, ranging from 0.975% to 1.45%,
determined by reference to the Company’s consolidated leverage ratio plus, in the case of certain
36
lenders, a mandatory cost calculated in accordance with the terms of the New Credit Agreement, or
(2) in the case of base rate loans and swing line loans, the highest of (a) the federal funds rate plus
0.5%, (b) the rate of interest in effect for such day as announced by JPMorgan Chase Bank, N.A. as its
‘‘prime rate,’’ and (c) the British Bankers Association LIBOR rate plus 1.0%, plus an applicable
percentage, ranging from 0.00% to 0.45%, determined by reference to the Company’s consolidated
leverage ratio. In addition to paying interest under the New Credit Agreement, we are also required to
pay certain fees in connection with the credit facility, including, but not limited to, an unused facility
fee and letter of credit fees.
The New Credit Agreement matures on February 18, 2019, subject to extension under certain
circumstances and subject to the terms of the New Credit Agreement. We may repay loans outstanding
under the New Credit Agreement from time to time without premium or penalty, other than customary
breakage costs, if any, and subject to the terms of the New Credit Agreement.
As of December 31, 2013, we held $267.9 million in cash and cash equivalents. Our ability to fund
operations from cash and cash equivalents could be limited by market liquidity as well as possible tax
implications of moving proceeds across jurisdictions. Of this amount, approximately $214.4 million of
cash and cash equivalents were held by foreign subsidiaries. Our U.S. operations currently generate
sufficient cash flows to meet our domestic obligations. We also have the ability to borrow funds at
reasonable interest rates and utilize the committed funds under our New Credit Agreement. However,
if amounts held by foreign subsidiaries were needed to fund operations in the United States, we could
be required to accrue and pay taxes to repatriate these funds. Such charges may include a federal tax
of up to 35.0% on dividends received in the U.S., potential state income taxes and an additional
withholding tax payable to foreign jurisdictions of up to 10.0%. However, our intent is to permanently
reinvest undistributed earnings of foreign subsidiaries and we do not have any current plans to
repatriate them to fund operations in the United States.
Covenant compliance
Under the Prior Credit Agreement, we were required to satisfy and maintain specified financial
ratios and other financial condition tests as of December 31, 2013. The financial ratios included a
consolidated interest coverage ratio based on consolidated earnings before income taxes, interest
expense, depreciation, and amortization (Consolidated EBITDA) to consolidated interest expense, as
defined in the Prior Credit Agreement. Our Prior Credit Agreement defined Consolidated EBITDA to
exclude unusual or non-recurring charges and gains. We were also required to maintain a consolidated
leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as
defined in the Credit Agreement, included all long and short-term debt, capital lease obligations and
any trade letters of credit that are outstanding. Finally, we were required to maintain a consolidated
net worth that exceeds a minimum net worth calculation. Consolidated net worth was defined as the
total stockholders’ equity as reported adjusted for any cumulative translation adjustments and goodwill
impairments.
As of December 31, 2013, our actual financial ratios calculated in accordance with our Prior Credit
Agreement compared to the required levels under the Prior Credit Agreement were as follows:
Actual Ratio
Required Level
Interest Charge Coverage Ratio . . . . . . . . . . . . .
7.43 to 1.00
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . .
0.62 to 1.00
Minimum level
3.50 to 1.00
Maximum level
3.25 to 1.00
Minimum level
Consolidated Net Worth . . . . . . . . . . . . . . . . . .
$986.1 million
$812.5 million
37
As of December 31, 2013, we were in compliance with all covenants related to the Prior Credit
Agreement and had $276.4 million of unused and available credit under the Prior Credit Agreement
and $23.6 million of stand-by letters of credit outstanding under the Prior Credit Agreement. There
were no borrowings outstanding under the Prior Credit Agreement at December 31, 2013.
The New Credit Agreement retains the interest charge coverage ratio and leverage ratio financial
covenants, but the consolidated net worth covenant has been eliminated. The required levels for the
interest charge coverage ratio and leverage ratio financial covenants remain consistent with the
required levels under the Prior Credit Agreement.
We have several senior note agreements as further detailed in Note 10 of Notes to Consolidated
Financial Statements. These senior note agreements require us to maintain a fixed charge coverage
ratio of consolidated EBITDA plus consolidated rent expense during the period to consolidated fixed
charges. Consolidated fixed charges are the sum of consolidated interest expense for the period and
consolidated rent expense.
As of December 31, 2013, our actual fixed charge coverage ratio calculated in accordance with our
senior note agreements compared to the required ratio therein was as follows:
Actual Ratio
Required Level
Minimum level
Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . .
4.99 to 1.00
2.00 to 1.00
In addition to financial ratios, the Prior Credit Agreement, New Credit Agreement and senior note
agreements contain affirmative and negative covenants that include limitations on disposition or sale of
assets, prohibitions on assuming or incurring any liens on assets with limited exceptions and limitations
on making investments other than those permitted by the agreements.
We used $0.1 million of net cash from operating activities of discontinued operations in 2013
related to Austroflex. We generated $7.9 million of net cash from investing activities of discontinued
operations resulting from proceeds received upon the disposal of Austroflex in August 2013.
Working capital (defined as current assets less current liabilities) as of December 31, 2013 was
$530.2 million compared to $454.9 million as of December 31, 2012. The increase was primarily due the
retirement in mid-May 2013 of $75.0 million of unsecured senior notes. The ratio of current assets to
current liabilities was 2.6 to 1 as of December 31, 2013 compared to 2.2 to 1 as of December 31, 2012,
increased primarily by the retirement of the senior notes previously mentioned and also by the buildup
of inventory as of December 31, 2013 in preparation for the lead free transition.
2012 Cash Flows
In 2012, we generated $130.3 million of cash from operating activities as compared to
$126.1 million in 2011. We generated approximately $103.0 million of free cash flow (a non-GAAP
financial measure, which we reconcile below, defined as net cash provided by continuing operating
activities minus capital expenditures plus proceeds from sale of assets), compared to free cash flow of
$104.4 million in 2011. Free cash flow as a percentage of net income from continuing operations was
146.3% in 2012 as compared to 135.2% in 2011.
In 2012, we used $42.9 million of net cash for investing activities, including $17.5 million for the
purchase of tekmar and $30.5 million of cash for capital equipment, offset partially by the proceeds
from the sale of buildings and equipment of $3.2 million.
In 2012, we used $80.7 million of net cash from financing activities. Our most significant cash
outlays included $65.8 million for the repurchase of two million shares of Class A common stock and
$16.0 million to fund dividend payments. Repayments of long-term debt related to amounts borrowed
under the Prior Credit Agreement in 2012 for operating purposes and repayments related to 2011
borrowings for the purchase of Socla.
38
We generated $3.2 million of net cash from operating activities of discontinued operations in 2012
related to a legal settlement regarding the disposal of a former Chinese subsidiary and from operating
activities of discontinued operations related to Austroflex. We generated $8.3 million of net cash from
investing activities of discontinued operations resulting primarily from proceeds received upon the
disposal of Flomatic in December 2012.
2011 Cash Flows
In 2011, we generated $126.1 million of cash from operating activities. We generated approximately
$104.4 million of free cash flow (a non-GAAP financial measure, which we reconcile below, defined as
net cash provided by continuing operating activities minus capital expenditures plus proceeds from sale
of assets). Free cash flow as a percentage of net income from continuing operations was 135.2% in
2011.
In 2011, we used $188.1 million of net cash from investing activities primarily for the purchase of
Socla and for capital equipment.
In 2011, we used $23.9 million of net cash from financing activities. Borrowings and repayments
primarily related to funds borrowed under the Prior Credit Agreement for the purchase of Socla and
then partially repaid. Other cash outflows included $27.2 million used to repurchase one million shares
of Class A common stock during 2011 and for $16.3 million of dividend payments.
Non-GAAP Financial Measures
We believe free cash flow to be an appropriate supplemental measure of our operating
performance because it provides investors with a measure of our ability to generate cash, to repay debt
and to fund acquisitions. Other companies may define free cash flow differently. Free cash flow does
not represent cash generated from operating activities in accordance with GAAP. Therefore it should
not be considered an alternative to net cash provided by operations as an indication of our
performance. Free cash flow should also not be considered an alternative to net cash provided by
operations as defined by GAAP. The cash conversion rate of free cash flow to net income from
continuing operations is also a measure of our performance in cash flow generation.
A reconciliation of net cash provided by continuing operations to free cash flow and calculation of
our cash conversion rate is provided below:
Net cash provided by continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
Less: additions to property, plant, and equipment . . . . . . . . . . . . . . . . . . . .
Plus: proceeds from the sale of property, plant, and equipment . . . . . . . . . .
Years Ended December 31,
2013
2012
2011
$118.3
(27.7)
1.5
(in millions)
$130.3
(30.5)
3.2
$126.1
(22.5)
0.8
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 92.1
$103.0
$104.4
Net income from continuing operations—as reported . . . . . . . . . . . . . . . . .
$ 60.9
$ 70.4
$ 77.2
Cash conversion rate of free cash flow to net income from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151.2% 146.3% 135.2%
Our net debt to capitalization ratio, a non-GAAP financial measure used by management,
decreased to 3.8% for 2013 from 10.8% for 2012. The decrease in net debt to capitalization ratio is due
to a reduction in net debt and incremental net income recorded during the period. Management
believes this to be an appropriate supplemental measure because it helps investors understand our
ability to meet our financing needs and as a basis to evaluate our financial structure. Our computation
may not be comparable to other companies that may define net debt to capitalization differently.
39
A reconciliation of long-term debt (including current portion) to net debt and our net debt to
capitalization ratio is provided below:
December 31,
2013
2012
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . .
Plus: long-term debt, net of current portion . . . . . . . . . . . . . . . .
Less: cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
$
(in millions)
2.2
305.5
(267.9)
$ 77.1
307.5
(271.3)
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39.8
$ 113.3
A reconciliation of capitalization is provided below:
Net debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
$
(in millions)
39.8
1,002.1
$ 113.3
939.5
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,041.9
$1,052.8
Net debt to capitalization ratio . . . . . . . . . . . . . . . . . . . . . . . .
3.8%
10.8%
Contractual Obligations
Our contractual obligations as of December 31, 2013 are presented in the following table:
Contractual Obligations
Payments Due by Period
Total
Less than
1 year
1-3 years
4-5 years
(in millions)
More than
5 years
Long-term debt obligations, including current
maturities(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . .
Capital lease obligations(a) . . . . . . . . . . . . . . . . . . .
Pension contributions . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnout payments(a) . . . . . . . . . . . . . . . . . . . . . . .
Other(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$307.7
28.6
9.5
17.2
61.6
4.4
30.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$459.2
$ 2.2
9.1
1.4
1.2
17.9
2.2
26.3
$60.3
$228.8
9.9
2.7
2.6
28.1
2.2
3.1
$277.4
$ 1.7
3.2
2.7
2.9
7.9
—
0.3
$18.7
$ 75.0
6.4
2.7
10.5
7.7
—
0.5
$102.8
(a) as recognized in the consolidated balance sheet
(b) the majority relates to commodity and capital commitments at December 31, 2013
We maintain letters of credit that guarantee our performance or payment to third parties in
accordance with specified terms and conditions. Amounts outstanding were approximately $23.6 million
as of December 31, 2013 and $34.8 million as of December 31, 2012, respectively. Our letters of credit
are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally
expire within one year of issuance. These instruments may exist or expire without being drawn down;
therefore they do not necessarily represent future cash flow obligations.
40
Off-Balance Sheet Arrangements
Except for operating lease commitments, we have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Application of Critical Accounting Policies and Key Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires
management to make judgments, assumptions and estimates that affect the amounts reported. A critical
accounting estimate is an assumption about highly uncertain matters and could have a material effect
on the consolidated financial statements if another, also reasonable, amount were used, or, a change in
the estimate is reasonably likely from period to period. We base our assumptions on historical
experience and on other estimates that we believe are reasonable under the circumstances. Actual
results could differ significantly from these estimates. There were no changes in our accounting policies
or significant changes in our accounting estimates during 2013. In 2011, we changed the amortization
period of pension gains and losses as discussed below under the caption ‘‘Pension benefits’’.
We periodically discuss the development, selection and disclosure of the estimates with our Audit
Committee. Management believes the following critical accounting policies reflect its more significant
estimates and assumptions.
Revenue recognition
We recognize revenue when all of the following criteria are met: (1) we have entered into a
binding agreement, (2) the product has shipped and title has passed, (3) the sales price to the customer
is fixed or is determinable and (4) collectability is reasonably assured. We recognize revenue based
upon a determination that all criteria for revenue recognition have been met, which, based on the
majority of our shipping terms, is considered to have occurred upon shipment of the finished product.
Some shipping terms require the goods to be received by the customer before title passes. In those
instances, revenues are not recognized until the customer has received the goods. We record estimated
reductions to revenue for customer returns and allowances and for customer programs. Provisions for
returns and allowances are made at the time of sale, derived from historical trends and form a portion
of the allowance for doubtful accounts. Customer programs, which are primarily annual volume
incentive plans, allow customers to earn credit for attaining agreed upon purchase targets from us. We
record estimated reductions to revenue, made at the time of sale, for customer programs based on
estimated purchase targets.
Allowance for doubtful accounts
The allowance for doubtful accounts is established to represent our best estimate of the net
realizable value of the outstanding accounts receivable. The development of our allowance for doubtful
accounts varies by region but in general is based on a review of past due amounts, historical write-off
experience, as well as aging trends affecting specific accounts and general operational factors affecting
all accounts. In addition, factors are developed in certain regions utilizing historical trends of sales and
returns and allowances and cash discount activities to derive a reserve for returns and allowances and
cash discounts.
We uniformly consider current economic trends and changes in customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. We also aggressively monitor the
creditworthiness of our largest customers, and periodically review customer credit limits to reduce risk.
If circumstances relating to specific customers change or unanticipated changes occur in the general
business environment, our estimates of the recoverability of receivables could be further adjusted.
41
Inventory valuation
Inventories are stated at the lower of cost or market with costs determined primarily on a first-in
first-out basis. We utilize both specific product identification and historical product demand as the basis
for determining our excess or obsolete inventory reserve. We identify all inventories that exceed a range
of one to four years in sales. This is determined by comparing the current inventory balance against
unit sales for the trailing twelve months. New products added to inventory within the past twelve
months are excluded from this analysis. A portion of our products contain recoverable materials,
therefore the excess and obsolete reserve is established net of any recoverable amounts. Changes in
market conditions, lower-than-expected customer demand or changes in technology or features could
result in additional obsolete inventory that is not saleable and could require additional inventory
reserve provisions.
In certain countries, additional inventory reserves are maintained for potential shrinkage
experienced in the manufacturing process. The reserve is established based on the prior year’s inventory
losses adjusted for any change in the gross inventory balance.
Goodwill and other intangibles
We have made numerous acquisitions over the years which included the recognition of a significant
amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or
circumstance indicates that an impairment loss may have been incurred. Application of the goodwill
impairment test requires judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, and determination of the fair value of each reporting unit. We
estimate the fair value of our reporting units using an income approach based on the present value of
estimated future cash flows, and when appropriate, guideline public company and guideline transaction
market approaches.
Accounting guidance allows us to review goodwill for impairment utilizing either qualitative or
quantitative analyses. We have the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events
and circumstances, we determine it is more likely than not that the fair value of a reporting unit is
greater than its carrying amount, then performing the two-step (quantitative) impairment test is
unnecessary.
We first identify those reporting units that we believe could pass a qualitative assessment to
determine whether further impairment testing is necessary. For each reporting unit identified, our
qualitative analysis includes:
1) A review of the most recent fair value calculation to identify the extent of the cushion
between fair value and carrying amount, to determine if a substantial cushion existed.
2) A review of events and circumstances that have occurred since the most recent fair value
calculation to determine if those events or circumstances would have affected our previous fair
value assessment. Items identified and reviewed include macroeconomic conditions, industry
and market changes, cost factor changes, events that affect the reporting unit, financial
performance against expectations and the reporting unit’s performance relative to peers.
We then compile this information and make our assessment of whether it is more likely than not
that the fair value of the reporting unit is less than its carrying amount. If we determine it is not more
likely than not, then no further quantitative analysis is required. We have eight reporting units in
continuing operations, one of which, Water Quality, has no goodwill. In 2013, we performed a
qualitative analysis for the Residential and Commercial, Bl¨ucher, Drains and Water Re-use, Dormont
and Asia Pacific reporting units. As a result of our qualitative analyses, we determined that the fair
values of the reporting units were greater than the carrying amounts.
42
The second analysis for goodwill impairment involves a quantitative two-step process. In 2013, we
performed a quantitative impairment analysis for the EMEA reporting unit and BRAE, including an
impairment analysis during the second quarter for the EMEA reporting unit due to results below
expectations. The EMEA reporting unit represents the EMEA geographic segment excluding the
Bl¨ucher reporting unit. The first step of the impairment test requires a comparison of the fair value of
each of our reporting units to the respective carrying value. If the carrying value of a reporting unit is
less than its fair value, no indication of impairment exists and a second step is not performed. If the
carrying amount of a reporting unit is higher than its fair value, there is an indication that impairment
may exist and a second step must be performed. In the second step, the impairment is computed by
comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the
goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value
of its goodwill, an impairment loss must be recognized for the excess and charged to operations.
Inherent in our development of the fair value of the reporting unit are the assumptions and
estimates used in the income and market approaches. The discounted cash flow method (income
approach) calculates the present value of future cash flows projections based on assumptions and
estimates derived from a review of our operating results, business plans, expected growth rates, cost of
capital and tax rates. We also make certain assumptions about future economic conditions and other
market data. We develop our assumptions based on our historical results including sales growth,
operating profits, working capital levels and tax rates. The market approaches calculate estimated fair
values based on valuation multiples derived from stock prices and enterprise values of publicly traded
companies that are comparable to our Company (guideline public company method) and based on
valuation multiples derived from actual transactions for comparable public and private companies
(guideline transaction method).
We believe that the discounted cash flow model is sensitive to the selected discount rate and the
market approaches are sensitive to valuation multiples used. We use third-party valuation specialists to
help develop the appropriate discount rate and valuation multiples. We use standard valuation practices
to arrive at a weighted average cost of capital based on the market and guideline public companies.
The higher the discount rate, the lower the discounted cash flows. While we believe that our estimate
of future cash flows and market approach valuations are reasonable, different assumptions could
significantly affect our valuations and result in impairments in the future.
During the fourth quarter of 2013, third quarter of 2012 and the fourth quarter of 2011, we
recognized a pre-tax non-cash goodwill impairment charge of $0.3 million, $1.0 million and $1.2 million,
respectively, related to our BRAE reporting unit within our Americas segment. As of December 31,
2013, the goodwill for BRAE had been fully impaired. The charges were taken as a result of reduced
expectations regarding the reporting unit.
As of our October 27, 2013 testing date, we had approximately $516.4 million of goodwill on our
balance sheet. Our impairment testing indicated that the fair values of the reporting units exceeded the
carrying values, thereby resulting in no impairment. The results of the EMEA reporting unit’s
quantitative impairment analysis are summarized in the table below:
Goodwill balance at
October 27, 2013
Book value of equity of
reporting unit at
October 27, 2013
Estimated fair value (implied
value of equity) at
October 27, 2013
(in millions)
Reporting unit
EMEA . . . . . . . . . . . . . . . . . . . . . .
A161.6
A341.8
A400.0
The underlying analyses supporting our fair value assessment are related to our comparable
companies’ historical and projected results, current transaction values and our outlook of our business’
long-term performance, which included key assumptions as to the appropriate revenue and EBITDA
multiples, discount rate and long-term growth rate. In connection with our October 27, 2013
impairment test, we utilized a discount rate of 10.5%, growth rates beyond our planning periods
43
ranging from 0% to 5% and long-term terminal growth rate of 3%. Future increases in discount rates
due to changing interest rates or a declining economic environment and different market multiples
could impact our assumptions and the value of our reporting unit.
Intangible assets such as trademarks and trade names are generally recorded in connection with a
business acquisition. Values assigned to intangible assets are determined by an independent valuation
firm based on our estimates and judgments regarding expectations of the success and life cycle of
products and technology acquired. During 2013, 2012 and 2011, we recognized non-cash pre-tax charges
of approximately $0.7 million, $0.4 million and $1.4 million, respectively, as an impairment of certain of
our indefinite-lived intangible assets. In addition, during 2011, we recognized non-cash pretax charges
of $13.5 million as an impairment of certain amortizable intangible assets in our EMEA segment. The
Company determined that the prospects for Austroflex, part of our EMEA segment, were lower than
originally estimated due to current operating profits below forecast and tempered future growth
expectations. Accordingly, the Company performed a fair value assessment and, as a result, wrote down
the long-lived assets by $14.8 million, or approximately 78%, including customer relationships of
$12.1 million, trade names of $1.4 million, and property, plant and equipment of $1.3 million. Fair
value was based on discounted cash flows using market participant assumptions and utilized an
estimated weighted average cost of capital. We subsequently completed the sale of Austroflex on
August 1, 2013 and Austroflex’s results of operations have been presented as discontinued operations
for all periods presented.
Revised accounting guidance issued in 2012 allows us to perform a qualitative impairment
assessment of indefinite-lived intangible assets consistent with the goodwill guidance noted previously.
For our 2013 impairment assessment, we performed quantitative assessments for all indefinite-lived
intangible assets. The methodology we employed was the relief from royalty method, a subset of the
income approach. That impairment review occurred as of October 27, 2013.
Product liability and workers’ compensation costs
Because of retention requirements associated with our insurance policies, we are generally
self-insured for potential product liability claims and for workers’ compensation costs associated with
workplace accidents. We are subject to a variety of potential liabilities in connection with product
liability cases and we maintain product liability and other insurance coverage, which we believe to be
generally in accordance with industry practices. For product liability cases in the U.S., management
establishes its product liability accrual by utilizing third-party actuarial valuations which incorporates
historical trend factors and our specific claims experience derived from loss reports provided by third-
party administrators. In other countries, we maintain insurance coverage with relatively high deductible
payments, as product liability claims tend to be smaller than those experienced in the U.S. Changes in
the nature of claims or the actual settlement amounts could affect the adequacy of this estimate and
require changes to the provisions. Because the liability is an estimate, the ultimate liability may be
more or less than reported.
Workers’ compensation liabilities in the U.S. are recognized for claims incurred (including claims
incurred but not reported) and for changes in the status of individual case reserves. At the time a
workers’ compensation claim is filed, a liability is estimated to settle the claim. The liability for
workers’ compensation claims is determined based on management’s estimates of the nature and
severity of the claims and based on analysis provided by third-party administrators and by various state
statutes and reserve requirements. We have developed our own trend factors based on our specific
claims experience, discounted based on risk-free interest rates. We employ third-party actuarial
valuations to help us estimate our workers’ compensation accrual. In other countries where workers’
compensation costs are applicable, we maintain insurance coverage with limited deductible payments.
Because the liability is an estimate, the ultimate liability may be more or less than reported and is
subject to changes in discount rates.
44
We determine the trend factors for product liability and workers’ compensation liabilities based on
consultation with outside actuaries.
We maintain excess liability insurance with outside insurance carriers to minimize our risks related
to catastrophic claims in excess of all self-insured positions. Any material change in the aforementioned
factors could have an adverse impact on our operating results.
Legal contingencies
We are a defendant in numerous legal matters including those involving environmental law and
product liability as discussed in more detail in Part I, Item 1. ‘‘Business—Product Liability,
Environmental and Other Litigation Matters.’’ As required by GAAP, we determine whether an
estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed
probable and the loss amount can be reasonably estimated, net of any applicable insurance proceeds.
When it is possible to estimate reasonably possible loss or range of loss above the amount accrued, that
estimate is aggregated and disclosed. Estimates of potential outcomes of these contingencies are
developed in consultation with outside counsel. While this assessment is based upon all available
information, litigation is inherently uncertain and the actual liability to fully resolve litigation cannot be
predicted with any assurance of accuracy. In the event of an unfavorable outcome in one or more legal
matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be
material to our operating results or cash flows for a particular quarterly or annual period. However,
based on information currently known to us, management believes that the ultimate outcome of all
legal contingencies, as they are resolved over time, is not likely to have a material adverse effect on our
financial condition, though the outcome could be material to our operating results for any particular
period depending, in part, upon the operating results for such period.
Pension benefits
We account for our pension plans in accordance with GAAP, which involves recording a liability or
asset based on the projected benefit obligation and the fair value of plan assets. Assumptions are made
regarding the valuation of benefit obligations and the performance of plan assets. The primary
assumptions are as follows:
(cid:129) Weighted average discount rate—this rate is used to estimate the current value of future
benefits. This rate is adjusted based on movement in long-term interest rates.
(cid:129) Expected long-term rate of return on assets—this rate is used to estimate future growth in
investments and investment earnings. The expected return is based upon a combination of
historical market performance and anticipated future returns for a portfolio reflecting the mix of
equity, debt and other investments indicative of our plan assets.
We determine these assumptions based on consultation with outside actuaries and investment
advisors. Any variance in these assumptions could have a significant impact on future recognized
pension costs, assets and liabilities.
On October 31, 2011, our Board of Directors voted to cease accruals effective December 31, 2011
under both the Pension Plan and Supplemental Employees Retirement Plan. We recorded a curtailment
charge of approximately $1.5 million in the fourth quarter of 2011 in connection with this action.
Effective November 1, 2011, we began amortizing the unamortized gains and losses over the remaining
life expectancy of the participants instead of our former policy of average remaining service period.
Income taxes
We estimate and use our expected annual effective income tax rates to accrue income taxes.
Effective tax rates are determined based on budgeted earnings before taxes, including our best estimate
of permanent items that will affect the effective rate for the year. Management periodically reviews
45
these rates with outside tax advisors and changes are made if material variances from expectations are
identified.
We recognize deferred taxes for the expected future consequences of events that have been
reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined
based on differences between the book values and tax bases of particular assets and liabilities, using tax
rates in effect for the years in which the differences are expected to reverse. A valuation allowance is
provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. We consider estimated future
taxable income and ongoing prudent tax planning strategies in assessing the need for a valuation
allowance.
New Accounting Standards
In July 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) 2013-11, ‘‘Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists’’ which is intended to eliminate
the diversity in practice in the presentation of unrecognized tax benefits in those instances. ASU
2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013, with early
adoption permitted. The adoption of this guidance is not expected to have a material impact on the
Company’s financial statements.
In March 2013, the FASB issued ASU No. 2013-05, ‘‘Parent’s Accounting for the Cumulative
Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a
Foreign Entity or of an Investment in a Foreign Entity.’’ This ASU is intended to eliminate diversity in
practice on the release of cumulative translation adjustment into net income when a parent either sells
a part or all of its investment in a foreign entity or no longer holds a controlling financial interest. In
addition, the amendments in this ASU resolve the diversity in practice for the treatment of business
combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign
entity. The provisions of this ASU are effective for interim and annual periods beginning after
December 15, 2013, with early adoption permitted, and must be applied prospectively. The Company
early adopted the ASU in 2013. The adoption of this guidance has not had a material impact on the
Company’s financial statements.
In February 2013, the FASB issued ASU 2013-02, ‘‘Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income’’ which requires additional disclosures about amounts
reclassified out of Other Comprehensive Income (OCI) by component, either on the face of the income
statement or as a separate footnote to the financial statements. ASU 2013-02 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2012. The adoption of this
guidance has not had a material impact on the Company’s financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We use derivative financial instruments primarily to reduce exposure to adverse fluctuations in
foreign exchange rates, interest rates and costs of certain raw materials used in the manufacturing
process. We do not enter into derivative financial instruments for trading purposes. As a matter of
policy, all derivative positions are used to reduce risk by hedging underlying economic exposure. The
derivatives we use are instruments with liquid markets. See Note 15 of Notes to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.
Our consolidated earnings, which are reported in United States dollars, are subject to translation
risks due to changes in foreign currency exchange rates. This risk is concentrated in the exchange rate
between the U.S. dollar and the euro; the U.S. dollar and the Canadian dollar; and the U.S. dollar and
the Chinese yuan.
46
Our foreign subsidiaries transact most business, including certain intercompany transactions, in
foreign currencies. Such transactions are principally purchases or sales of materials and are
denominated in European currencies or the U.S. or Canadian dollar. We use foreign currency forward
exchange contracts to manage the risk related to intercompany purchases that occur during the course
of a year and certain open foreign currency denominated commitments to sell products to third parties.
For 2013, we recorded a $0.1 million loss in other income associated with the change in the fair value
of such contracts.
We have historically had a low exposure on the cost of our debt to changes in interest rates.
Information about our long-term debt including principal amounts and related interest rates appears in
Note 10 of Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2013.
We purchase significant amounts of bronze ingot, brass rod, cast iron, steel and plastic, which are
utilized in manufacturing our many product lines. Our operating results can be adversely affected by
changes in commodity prices if we are unable to pass on related price increases to our customers. We
manage this risk by monitoring related market prices, working with our suppliers to achieve the
maximum level of stability in their costs and related pricing, seeking alternative supply sources when
necessary and passing increases in commodity costs to our customers, to the maximum extent possible,
when they occur.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements listed in section (a) (1) of ‘‘Part IV, Item 15. Exhibits and Financial
Statement Schedules’’ of this annual report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or
Exchange Act, as of the end of the period covered by this report, we carried out an evaluation under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. In designing
and evaluating our disclosure controls and procedures, we recognize that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily applies its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our disclosure controls and
procedures is also necessarily limited by the staff and other resources available to us and the
geographic diversity of our operations. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In connection with these rules, we will continue to
review and document our disclosure controls and procedures, including our internal control over
financial reporting, and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that our systems evolve with our business.
47
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework
(1992).
Based on our assessment and those criteria, management believes that the Company maintained
effective internal control over financial reporting as of December 31, 2013.
The independent registered public accounting firm that audited the Company’s consolidated
financial statements included elsewhere in this Annual Report on Form 10-K has issued an audit report
on the Company’s internal control over financial reporting. That report appears immediately following
this report.
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Watts Water Technologies, Inc.:
We have audited Watts Water Technologies, Inc.’s internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Watts
Water Technologies, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Watts Water Technologies, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Watts Water Technologies, Inc. and
subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2013, and our report dated February 27, 2014 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Boston, Massachusetts
February 27, 2014
Item 9B. OTHER INFORMATION.
None.
49
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to the executive officers of the Company is set forth in Part I, Item 1 of
this Report under the caption ‘‘Executive Officers and Directors’’ and is incorporated herein by
reference. The information provided under the captions ‘‘Information as to Nominees for Director,’’
‘‘Corporate Governance,’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in our
definitive Proxy Statement for our 2014 Annual Meeting of Stockholders to be held on May 14, 2014 is
incorporated herein by reference.
We have adopted a Code of Business Conduct applicable to all officers, employees and Board
members. The Code of Business Conduct is posted in the Investor Relations section of our website,
www.wattswater.com. We will provide you with a print copy of our Code of Business Conduct free of
charge on written request to Kenneth R. Lepage, Secretary, Watts Water Technologies, Inc., 815
Chestnut Street, North Andover, MA 01845. Any amendments to, or waivers of, the Code of Business
Conduct which apply to our chief executive officer, chief financial officer, corporate controller or any
person performing similar functions will be disclosed on our website promptly following the date of
such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION.
The information provided under the captions ‘‘Director Compensation,’’ ‘‘Corporate Governance,’’
‘‘Compensation Discussion and Analysis,’’ ‘‘Executive Compensation,’’ ‘‘Compensation Committee
Interlocks and Insider Participation,’’ and ‘‘Compensation Committee Report’’ in our definitive Proxy
Statement for our 2014 Annual Meeting of Stockholders to be held on May 14, 2014 is incorporated
herein by reference.
The ‘‘Compensation Committee Report’’ contained in our Proxy Statement shall not be deemed
‘‘soliciting material’’ or ‘‘filed’’ with the Securities and Exchange Commission or otherwise subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated
by reference in any filings under the Securities Act of 1933 or the Exchange Act, except to the extent
we specifically request that such information be treated as soliciting material or specifically incorporate
such information by reference into a document filed under the Securities Act or Exchange Act.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information appearing under the caption ‘‘Principal Stockholders’’ in our definitive Proxy
Statement for our 2014 Annual Meeting of Stockholders to be held on May 14, 2014 is incorporated
herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2013, about the shares of Class A
common stock that may be issued upon the exercise of stock options issued under the Company’s
Second Amended and Restated 2004 Stock Incentive Plan, and the settlement of restricted stock units
granted under our Management Stock Purchase Plan as well as the number of shares remaining for
50
future issuance under our Second Amended and Restated 2004 Stock Incentive Plan and Management
Stock Purchase Plan.
Equity Compensation Plan Information
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plan (excluding securities
reflected in column (a))
(c)
1,171,893(1)
$40.18
2,547,429(2)
None
1,171,893(1)
None
$40.18
None
2,547,429(2)
Plan Category
Equity compensation
plans approved by
security holders . . . . . .
Equity compensation
plans not approved by
security holders . . . . . .
. . . . . . . . . . . . . . .
Total
(1) Represents 1,029,067 outstanding options and 10,956 deferred restricted stock awards under the
Second Amended and Restated 2004 Stock Incentive Plan, and 131,870 outstanding restricted stock
units under the Management Stock Purchase Plan.
(2) Includes 1,650,400 shares available for future issuance under the Second Amended and Restated
2004 Stock Incentive Plan, and 897,029 shares available for future issuance under the Management
Stock Purchase Plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information provided under the captions ‘‘Corporate Governance’’ and ‘‘Certain Relationships
and Related Transactions’’ in our definitive Proxy Statement for our 2014 Annual Meeting of
Stockholders to be held on May 14, 2014 is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information provided under the caption ‘‘Ratification of Independent Registered Public
Accounting Firm’’ in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders to
be held on May 14, 2014 is incorporated herein by reference.
51
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
PART IV
The following financial statements are included in a separate section of this Report commencing
on the page numbers specified below:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2013,
2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2013 and 2012 . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2013,
2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
56
57
58
59
60
61
(a)(2) Schedules
Schedule II—Valuation and Qualifying Accounts for the years ended
December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
All other required schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are included in the Notes to the Consolidated Financial
Statements.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this
Annual Report on Form 10-K.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
WATTS WATER TECHNOLOGIES, INC.
By:
/s/ DEAN P. FREEMAN
Dean P. Freeman
Chief Executive Officer, President and
Chief Financial Officer
DATED: February 27, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ DEAN P. FREEMAN
Dean P. Freeman
Chief Executive Officer, President and
Chief Financial Officer (Principal
Executive Officer and Principal
Financial Officer)
February 27, 2014
/s/ KENNETH S. KOROTKIN
Kenneth S. Korotikin
Chief Accounting Officer
(Principal Accounting Officer)
February 27, 2014
/s/ ROBERT L. AYERS
Robert L. Ayers
/s/ BERNARD BAERT
Bernard Baert
/s/ KENNETT F. BURNES
Kennett F. Burnes
/s/ RICHARD J. CATHCART
Richard J. Cathcart
/s/ W. CRAIG KISSEL
W. Craig Kissel
Director
February 27, 2014
Director
February 27, 2014
Director
February 27, 2014
Director
February 27, 2014
Director
February 27, 2014
53
Signature
Title
Date
/s/ JOHN K. MCGILLICUDDY
John K. McGillicuddy
/s/ JOSEPH T. NOONAN
Joseph T. Noonan
/s/ MERILEE RAINES
Merilee Raines
Chairman of the Board
February 27, 2014
Director
February 27, 2014
Director
February 27, 2014
54
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Watts Water Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Watts Water Technologies, Inc.
and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2013. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement Schedule II—Valuation and Qualifying
Accounts. These consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Watts Water Technologies, Inc. and subsidiaries as of
December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Watts Water Technologies, Inc.’s internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 27, 2014 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Boston, Massachusetts
February 27, 2014
55
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in millions, except per share information)
Years Ended December 31,
2013
2012
2011
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,473.5
947.0
$1,427.4
913.9
$1,407.4
899.0
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain on) adjustment to disposal of business . . . . . . . . . . . . . . . . . . . .
Goodwill and other long-lived asset impairment charges . . . . . . . . . . . .
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . .
Loss from discontinued operations, net of taxes . . . . . . . . . . . . . . . . . .
526.5
405.7
8.7
(0.6)
1.2
111.5
(0.6)
21.5
2.8
23.7
87.8
26.9
60.9
(2.3)
513.5
381.0
4.2
1.6
3.4
123.3
(0.7)
24.6
(0.8)
23.1
100.2
29.8
70.4
(2.0)
508.4
371.5
8.8
(7.7)
2.3
133.5
(1.0)
25.8
0.8
25.6
107.9
30.7
77.2
(10.8)
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
58.6
$
68.4
$
66.4
Basic EPS
Income (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS
Income (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
1.72
(0.06)
1.65
35.5
1.71
(0.07)
1.65
35.6
$
$
$
$
1.96
(0.06)
1.90
36.0
1.95
(0.05)
1.90
36.1
2.07
(0.29)
1.78
37.3
2.06
(0.28)
1.78
37.5
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.50
$
0.44
$
0.44
The accompanying notes are an integral part of these consolidated financial statements.
56
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Amounts in millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58.6
$68.4
$ 66.4
Years Ended December 31,
2013
2012
2011
Other comprehensive income (loss):
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency adjustment for sale of foreign entity . . . . . . . . . . . . . . . . . . .
Defined benefit pension plans, net of tax:
Net loss, net of tax benefits of $0.8, $4.1, and $2.7 in 2013, 2012 and 2011,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost included in net periodic pension cost,
net of tax expense of $0.1 in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net losses included in net periodic pension cost, net of tax
expense of $0.4, $0.2, and $1.0 in 2013, 2012 and 2011, respectively . . . .
Reduction in obligation related to pension curtailment, net of tax expense
of $5.4 in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.5
—
14.3
—
(16.4)
(8.6)
(1.3)
(6.5)
(4.2)
—
0.6
—
—
0.4
—
0.2
1.7
8.6
6.3
Defined benefit pension plans, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.7)
(6.1)
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.8
8.2
(18.7)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$81.4
$76.6
$ 47.7
The accompanying notes are an integral part of these consolidated financial statements.
57
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in millions, except share information)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts receivable, less allowance for doubtful accounts of $9.7 in 2013 and $9.5 in
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS:
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
December 31,
2013
2012
$ 267.9
—
$ 271.3
2.1
212.9
310.2
35.0
29.8
1.3
—
857.1
219.9
514.8
132.4
3.8
12.2
206.2
288.0
22.5
21.5
—
11.7
823.3
221.7
504.0
145.4
4.8
9.8
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,740.2
$1,709.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 145.6
135.2
43.9
2.2
—
$ 131.3
116.6
41.9
77.1
1.5
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT, NET OF CURRENT PORTION . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDERS’ EQUITY:
Preferred Stock, $0.10 par value; 5,000,000 shares authorized; no shares issued or outstanding
Class A common stock, $0.10 par value; 80,000,000 shares authorized; 1 vote per share;
issued and outstanding, 28,824,779 shares in 2013 and 28,673,639 shares in 2012 . . . . . . . .
Class B common stock, $0.10 par value; 25,000,000 shares authorized; 10 votes per share;
issued and outstanding, 6,489,290 shares in 2013 and 6,588,680 shares in 2012 . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss)
326.9
305.5
45.9
59.8
—
2.9
0.6
473.5
513.1
12.0
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,002.1
368.4
307.5
44.9
48.7
—
2.9
0.6
448.7
498.1
(10.8)
939.5
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . .
$1,740.2
$1,709.0
The accompanying notes are an integral part of these consolidated financial statements.
58
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Amounts in millions, except share information)
Class A
Common Stock
Class B
Common Stock
Shares
Amount
Shares Amount
Additional
Paid-In
Capital
Balance at December 31, 2010 . . 30,102,677
$ 3.0
6,953,680
$ 0.7
$405.2
Accumulated
Other
Total
Retained Comprehensive Stockholders’
Earnings
Income (Loss)
Equity
$492.9
66.4
$ (0.3)
(18.7)
$ 901.5
47.7
Comprehensive income (loss) .
Shares of Class A common
stock issued upon the
exercise of stock options . . .
Stock-based compensation . . .
Stock repurchase . . . . . . . . .
Issuance of shares of restricted
Class A common stock . . . .
Net change in restricted stock
units . . . . . . . . . . . . . . .
Common stock dividends . . . .
247,870
—
(1,000,000)
(0.1)
79,438
41,429
—
—
5.4
8.3
1.2
(27.1)
(0.5)
(0.3)
(16.3)
5.4
8.3
(27.2)
(0.5)
0.9
(16.3)
Balance at December 31, 2011 . . 29,471,414
$ 2.9
6,953,680
$ 0.7
$420.1
Comprehensive income . . . . .
Shares of Class B common
stock converted to Class A
common stock . . . . . . . . .
Shares of Class A common
stock issued upon the
exercise of stock options . . .
Stock-based compensation . . .
Stock repurchase . . . . . . . . .
Issuance of net shares of
restricted Class A common
stock . . . . . . . . . . . . . . .
Net change in restricted stock
units . . . . . . . . . . . . . . .
Common stock dividends . . . .
365,000
0.1
(365,000)
(0.1)
589,798
0.1
(2,000,000)
(0.2)
141,767
105,660
—
—
17.7
6.6
4.3
Balance at December 31, 2012 . . 28,673,639
$ 2.9
6,588,680
$ 0.6
$448.7
Comprehensive income . . . . .
Shares of Class B common
stock converted to Class A
common stock . . . . . . . . .
Shares of Class A common
stock issued upon the
exercise of stock options . . .
Stock-based compensation . . .
Stock repurchase . . . . . . . . .
Issuance of net shares of
restricted Class A common
stock . . . . . . . . . . . . . . .
Net change in restricted stock
units . . . . . . . . . . . . . . .
Common stock dividends . . . .
99,390
—
(99,390)
—
361,094
(453,880)
75,592
68,944
—
—
—
—
11.9
9.6
3.3
$515.1
68.4
$(19.0)
8.2
$ 919.8
76.6
17.8
6.6
(65.8)
(0.8)
1.3
(16.0)
$(10.8)
22.8
$ 939.5
81.4
11.9
9.6
(23.0)
(1.6)
2.0
(17.7)
(65.6)
(0.8)
(3.0)
(16.0)
$498.1
58.6
(23.0)
(1.6)
(1.3)
(17.7)
Balance at December 31, 2013
28,824,779
$ 2.9
6,489,290
$ 0.6
$473.5
$513.1
$ 12.0
$1,002.1
The accompanying notes are an integral part of these consolidated financial statements.
59
Watts Water Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in millions)
Years Ended December 31,
2013
2012
2011
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile income from continuing operations to net cash provided by
$ 58.6
(2.3)
60.9
$ 68.4
(2.0)
70.4
$ 66.4
(10.8)
77.2
continuing operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on disposal and impairment of goodwill, property, plant and equipment
and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects from business acquisitions and
divestures:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets
. . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities
Net cash provided by continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . .
Investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of asset held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangible assets and other
Business acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES
Proceeds from long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of capital leases and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from share transactions under employee stock plans . . . . . . . . . . . . . . . . . . .
Tax benefit of stock awards exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to repurchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.2
14.7
1.5
9.6
(6.8)
(3.5)
(17.3)
(14.5)
39.5
118.3
(27.7)
1.5
—
—
2.1
—
—
(24.1)
—
(77.2)
(4.8)
11.9
1.3
(23.0)
(17.7)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(109.5)
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by operating activities of discontinued operations
. . . . . . . . . .
Net cash provided by (used in) investing activities of discontinued operations . . . . . . . . . . .
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . .
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of fixed assets under financing agreement
. . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under management stock purchase plan . . . . . . . . . . . . . . . . . . . . . . .
CASH PAID FOR:
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1
(0.1)
7.9
(3.4)
271.3
$ 267.9
$ —
—
$ —
$
$
3.7
0.7
$ 21.5
$ 32.7
33.1
15.4
4.1
6.6
—
2.0
(7.1)
1.1
4.7
32.1
15.8
(9.8)
8.3
3.7
3.1
3.1
(8.9)
1.5
130.3
126.1
(30.5)
0.2
(2.1)
3.0
4.1
(0.1)
(17.5)
(42.9)
9.2
(23.9)
(2.9)
17.8
0.9
(65.8)
(16.0)
(80.7)
3.2
3.2
8.3
21.4
249.9
(22.5)
0.8
(8.1)
—
8.1
(0.9)
(165.5)
(188.1)
184.0
(168.0)
(2.6)
5.4
0.8
(27.2)
(16.3)
(23.9)
7.3
(0.2)
(0.2)
(79.0)
328.9
$271.3
$ 249.9
$ 25.2
17.5
$
$
$
7.7
1.1
0.5
$ 23.9
$ 27.1
$ 225.5
165.5
$ 60.0
$
$
4.3
0.4
$ 24.7
$ 35.5
The accompanying notes are an integral part of these consolidated financial statements.
60
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Description of Business
Watts Water Technologies, Inc. (the Company), through its subsidiaries, designs, manufactures and
sells an extensive line of water safety and flow control products primarily for the water quality, water
conservation, water safety and water flow control markets located predominantly in the Americas and
Europe, Middle East and Africa (EMEA) with a presence in Asia Pacific.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority and
wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions
are eliminated.
Cash Equivalents
Cash equivalents consist of instruments with remaining maturities of three months or less at the
date of purchase and consist primarily of certificates of deposit and money market funds, for which the
carrying amount is a reasonable estimate of fair value.
Investment Securities
Investment securities at December 31, 2012 consisted of certificates of deposit with original
maturities of greater than three months. The Company did not hold investment securities at
December 31, 2013.
Trading securities are recorded at fair value. The Company determines the fair value by obtaining
market value when available from quoted prices in active markets. In the absence of quoted prices, the
Company uses other inputs to determine the fair value of the investments. All changes in the fair value
as well as any realized gains and losses from the sale of the securities are recorded when incurred to
the consolidated statements of operations as other income or expense.
Allowance for Doubtful Accounts
Allowance for doubtful accounts includes reserves for bad debts, sales returns and allowances and
cash discounts. The Company analyzes the aging of accounts receivable, individual accounts receivable,
historical bad debts, concentration of receivables by customer, customer credit worthiness, current
economic trends, and changes in customer payment terms. The Company specifically analyzes individual
accounts receivable and establishes specific reserves against financially troubled customers. In addition,
factors are developed in certain regions utilizing historical trends of sales and returns and allowances
and cash discount activities to derive a reserve for returns and allowances and cash discounts.
Concentration of Credit
The Company sells products to a diversified customer base and, therefore, has no significant
concentrations of credit risk. In 2013 and 2012, no customer accounted for 10% or more of the
Company’s total sales.
61
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Inventories
Inventories are stated at the lower of cost (using primarily the first-in, first-out method) or market.
Market value is determined by replacement cost or net realizable value. Historical usage is used as the
basis for determining the reserve for excess or obsolete inventories.
Goodwill and Other Intangible Assets
Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net
tangible and intangible assets acquired. Goodwill and other intangible assets with indefinite useful lives
are not amortized, but rather are tested at least annually for impairment. The test for 2013 was
performed as of October 27, 2013.
Impairment of Goodwill and Long-Lived Assets
The changes in the carrying amount of goodwill by geographic segment are as follows:
Year Ended December 31, 2013
Gross Balance
Accumulated Impairment Losses
Net Goodwill
Balance
January 1,
2013
Acquired
During
the
Period
Foreign
Currency
Translation December 31, January 1, Loss During December 31, December 31,
and Other
Impairment
the Period
Balance
Balance
Balance
2013
2013
2013
2013
Americas . . . . . .
EMEA . . . . . . . .
Asia Pacific . . . .
$225.6
289.7
12.9
Total . . . . . . . .
$528.2
$—
—
—
$—
$ (0.9)
11.6
0.4
$11.1
$224.7
301.3
13.3
$539.3
$(24.2)
—
—
$(24.2)
$(0.3)
—
—
$(0.3)
$(24.5)
—
—
$(24.5)
$200.2
301.3
13.3
$514.8
(in millions)
Year Ended December 31, 2012
Gross Balance
Accumulated Impairment Losses
Net Goodwill
Balance
January 1,
2012
Acquired
During
the
Period
Foreign
Currency
Translation December 31, January 1, Loss During December 31, December 31,
and Other
Impairment
the Period
Balance
Balance
Balance
2012
2012
2012
2012
Americas . . . . . .
EMEA . . . . . . . .
Asia Pacific . . . .
$213.8
281.1
12.7
Total . . . . . . . .
$507.6
$11.7
—
—
$11.7
$0.1
8.6
0.2
$8.9
(in millions)
$225.6
289.7
12.9
$528.2
$(23.2)
—
—
$(23.2)
$(1.0)
—
—
$(1.0)
$(24.2)
—
—
$(24.2)
$201.4
289.7
12.9
$504.0
Goodwill is tested for impairment at least annually or more frequently if events or circumstances
indicate that it is ‘‘more likely than not’’ that goodwill might be impaired, such as a change in business
conditions. The Company performs its annual goodwill impairment assessment in the fourth quarter of
each year.
The Company determined that the future prospects for its Blue Ridge Atlantic Enterprises, Inc.
(BRAE) reporting unit in the Americas were lower than originally estimated as future sales growth
expectations had been reduced a number of times since the 2010 acquisition of BRAE. The Company
recorded pre-tax goodwill impairment charges of $0.3 million, $1.0 million and $1.2 million in 2013,
62
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
2012 and 2011, respectively, for that reporting unit. The BRAE goodwill balance was fully impaired in
2013. The goodwill impairment charges were offset by the reduction in anticipated earnout payments of
equal amounts, with no remaining earnout liability as of December 31, 2013. The Company estimated
the fair value of the reporting unit using the expected present value of future cash flows.
As of October 28, 2012, which was the previous annual impairment analysis date, the fair value of
the EMEA reporting unit exceeded the carrying value by approximately 40%. The EMEA reporting
unit represents the EMEA geographic segment excluding the Bl¨ucher reporting unit. During the six
months ended June 30, 2013, operating results for the EMEA reporting unit had been hindered by the
downturn in the economic environment in Europe and continued to fall below the expected operating
results and growth rates used in the calculation of the present value of future cash flow projections,
triggering the decision to update the impairment analysis. As a result of the fair value assessment, it
was determined that the fair value of the EMEA reporting unit decreased from the prior year but
continued to exceed its carrying value as of June 30, 2013. An updated fair value assessment was
performed at the annual impairment date of October 27, 2013. The updated fair value assessment
determined that the fair value of the EMEA reporting continued to exceed its carrying value by
approximately 20% in 2013.
On January 31, 2012, the Company completed the acquisition of tekmar Control Systems (tekmar)
in a share purchase transaction. The initial purchase price paid was CAD $18.0 million, with
post-closing adjustments related to working capital and an earnout based on the attainment of certain
future earnings levels. The initial purchase price paid was equal to approximately $17.8 million based
on the exchange rate of Canadian dollar to U.S. dollar as of January 31, 2012. The total purchase price
will not exceed CAD $26.2 million. The Company accounted for the transaction as a business
combination. In January 2013, the Company completed a purchase price allocation that resulted in the
recognition of $11.7 million in goodwill and $10.1 million in intangible assets (see Note 5).
Indefinite-lived intangibles are tested for impairment at least annually or more frequently if events
or circumstances, such as a change in business conditions, indicate that it is ‘‘more likely than not’’ that
the intangible asset might be impaired. The Company performs its annual indefinite-lived intangibles
impairment assessment in the fourth quarter of each year. For the 2013, 2012 and 2011 impairment
assessments, the Company performed quantitative assessments for all indefinite-lived intangible assets.
The methodology employed was the relief from royalty method, a subset of the income approach.
Based on the results of the assessment the Company recognized non-cash pre-tax impairment charges
in 2013, 2012 and 2011 of approximately $0.7 million, $0.4 million and $1.4 million, respectively. The
impairment charge of $0.7 million in 2013 consists of a $0.3 million impairment charge for a trade
name in the Americas segment and a $0.4 million impairment charge for two trade names in the
EMEA segment. The gross carrying amount in the table below reflects the impairment charges.
Intangible assets with estimable lives and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset
group may not be recoverable. Recoverability of intangible assets with estimable lives and other
long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to
future net undiscounted pretax cash flows expected to be generated by the asset or asset group. If these
comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by
which the carrying amount of the asset or asset group exceeds the related estimated fair value.
Estimated fair value is based on either discounted future pretax operating cash flows or appraised
values, depending on the nature of the asset. The Company determines the discount rate for this
analysis based on the weighted average cost of capital based on the market and guideline public
63
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
companies for the related businesses and does not allocate interest charges to the asset or asset group
being measured. Judgment is required to estimate future operating cash flows.
Intangible assets include the following:
December 31,
2013
2012
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Patents . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Total amortizable intangibles . . . . .
Indefinite-lived intangible assets . . . . .
$ 16.6
133.0
26.9
13.7
8.8
199.0
41.9
$ (12.6)
(76.4)
(10.9)
(3.0)
(5.6)
(108.5)
—
$
(in millions)
4.0
56.6
16.0
10.7
3.2
$ 16.5
131.4
27.4
13.5
8.7
90.5
41.9
197.5
41.8
$(11.7)
(65.9)
(9.0)
(1.8)
(5.5)
(93.9)
—
$
4.8
65.5
18.4
11.7
3.2
103.6
41.8
Total . . . . . . . . . . . . . . . . . . . . . . .
$240.9
$(108.5)
$132.4
$239.3
$(93.9)
$145.4
Aggregate amortization expense for amortized intangible assets for 2013, 2012 and 2011 was
$14.7 million, $15.4 million and $15.8 million, respectively. Additionally, future amortization expense on
amortizable intangible assets is expected to be $14.9 million for 2014, $14.7 million for 2015,
$14.2 million for 2016, $13.8 million for 2017, and $10.0 million for 2018. Amortization expense is
provided on a straight-line basis over the estimated useful lives of the intangible assets. The weighted-
average remaining life of total amortizable intangible assets is 8.4 years. Patents, customer relationships,
technology, trade names and other amortizable intangibles have weighted-average remaining lives of
5.6 years, 5.6 years, 11.4 years, 10.9 years and 40.2 years, respectively. Indefinite-lived intangible assets
primarily include trade names and trademarks.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and
improvements and 3 to 15 years for machinery and equipment.
Taxes, Other than Income Taxes
Taxes assessed by governmental authorities on sale transactions are recorded on a net basis and
excluded from sales in the Company’s consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences
64
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes tax benefits when the item in question meets the more-likely-than-not
(greater than 50% likelihood of being sustained upon examination by the taxing authorities) threshold.
During 2013, due to the completion of the federal audit, unrecognized tax benefits decreased by
approximately $3.7 million related to an adjustment to temporary differences that did not impact
overall income tax expense.
As of December 31, 2013, the Company had gross unrecognized tax benefits of approximately
$0.8 million, approximately $0.2 million of which, if recognized, would affect the effective tax rate. The
difference between the amount of unrecognized tax benefits and the amount that would affect the
effective tax rate consists of the federal tax benefit of state income tax items as well as a liability
related to the 2011 acquisition of Danfoss Socla S.A.S (Socla) in France that will be recoverable under
the terms of the acquisition agreement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
$ 4.6
0.1
(0.2)
(3.7)
$ 0.8
In February 2013, the United States Internal Revenue Service concluded an audit of the
Company’s 2009, 2010 and 2011 tax years. The Company conducts business in a variety of locations
throughout the world resulting in tax filings in numerous domestic and foreign jurisdictions. The
Company is subject to tax examinations regularly as part of the normal course of business. The
Company’s major jurisdictions are the U.S., Canada, China, Netherlands, U.K., Germany, Italy and
France. With few exceptions the Company is no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations for years before 2007. The statute of limitations in our major
jurisdictions is open in the U.S. for the year 2010 and later; in Canada for 2009 and later; and in the
Netherlands for 2012 and later.
The Company accounts for interest and penalties related to uncertain tax positions as a component
of income tax expense.
Foreign Currency Translation
The financial statements of subsidiaries located outside the United States generally are measured
using the local currency as the functional currency. Balance sheet accounts, including goodwill, of
foreign subsidiaries are translated into United States dollars at year-end exchange rates. Income and
expense items are translated at weighted average exchange rates for each period. Net translation gains
or losses are included in other comprehensive income, a separate component of stockholders’ equity.
The Company does not provide for U.S. income taxes on foreign currency translation adjustments since
it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Gains and losses
from foreign currency transactions of these subsidiaries are included in net earnings.
65
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Stock-Based Compensation, Former Chief Executive Officer Separation Costs and Former Chief Financial
Officer Retention Costs
The Company records compensation expense in the financial statements for share-based awards
based on the grant date fair value of those awards. Stock-based compensation expense includes an
estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on
a straight-line basis, which is generally commensurate with the vesting term. The benefits associated
with tax deductions in excess of recognized compensation cost are reported as a financing cash flow.
At December 31, 2013, the Company had two stock-based compensation plans with total
unrecognized compensation costs related to unvested stock-based compensation arrangements of
approximately $20.8 million and a total weighted average remaining term of 2.5 years. Included in the
$20.8 million of unrecognized compensation costs is $4.5 million related to equity awards previously
granted to David J. Coghlan, the Company’s former Chief Executive Officer, which will not be
recognized. Refer to Note 18 for details on Mr. Coghlan’s resignation on January 9, 2014. For 2013,
2012 and 2011, the Company recognized compensation costs related to stock-based programs of
approximately $9.6 million, $5.8 million and $5.3 million, respectively, in selling, general and
administrative expenses. The Company recorded approximately $1.2 million of tax benefits during 2013
and $0.7 million in 2012 and 2011 for the compensation expense relating to its stock options. For 2013,
2012 and 2011, the Company recorded approximately $1.9 million, $1.4 million and $1.5 million,
respectively, of tax benefit for its other stock-based plans. For 2013, 2012 and 2011, the recognition of
total stock-based compensation expense impacted both basic and diluted net income per common share
by $0.14, $0.10 and $0.09, respectively.
On May 23, 2012, William C. McCartney resigned from his position as Chief Financial Officer of
the Company. Pursuant to the retention agreement entered into with Mr. McCartney, the Company
recorded a charge of $1.5 million over the retention period, consisting of cash payments of $0.7 million
and a non-cash charge of $0.8 million for the modification of stock options and restricted stock awards
On January 26, 2011, Patrick S. O’Keefe resigned from his positions as Chief Executive Officer,
President and Director. Pursuant to a separation agreement, the Company recorded a charge of
$6.3 million consisting of $3.3 million in expected cash severance and a non-cash charge of $3.0 million
for the modification of stock options and restricted stock awards.
Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by the weighted average
number of common shares outstanding. The calculation of diluted income per share assumes the
conversion of all dilutive securities (see Note 12).
66
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Net income and number of shares used to compute net income per share, basic and assuming full
dilution, are reconciled below:
Years Ended December 31,
2013
2012
2011
Per
Share
Income Shares Amount Income Shares Amount Income Shares Amount
Per
Share
Per
Share
Net
Net
Net
Basic EPS . . . . . . . . . . . . . . . . . . . . . $58.6
Dilutive securities, principally common
(Amounts in millions, except per share information)
36.0
$1.65 $68.4
$1.90 $66.4
37.3
35.5
$1.78
stock options . . . . . . . . . . . . . . . . . — 0.1
—
— 0.1
—
— 0.2
—
Diluted EPS . . . . . . . . . . . . . . . . . . . $58.6
35.6
$1.65 $68.4
36.1
$1.90 $66.4
37.5
$1.78
The computation of diluted net income per share for the years ended December 31, 2013, 2012
and 2011 excludes the effect of the potential exercise of options to purchase approximately 0.2 million,
0.2 million and 0.7 million shares, respectively, because the exercise price of the option was greater
than the average market price of the Class A common stock and the effect would have been
anti-dilutive.
On April 30, 2013, the Board of Directors authorized the repurchase of up to $90.0 million of the
Company’s Class A common stock from time to time on the open market or in privately negotiated
transactions. The timing and number of any shares repurchased will be determined by the Company’s
management based on its evaluation of market conditions. Repurchases may also be made under a
Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be
precluded from doing so under insider trading laws. The repurchase program may be suspended or
discontinued at any time, subject to the terms of any Rule 10b5-1 plan the Company may enter into
with respect to the repurchase program. During the year ended December 31, 2013, the Company
repurchased approximately 454,000 shares of Class A common stock at a cost of approximately
$23.0 million.
On May 16, 2012, the Board of Directors authorized a stock repurchase program of up to two
million shares of the Company’s Class A common stock. The stock repurchase program was completed
in July 2012, as the Company repurchased the entire two million shares of Class A common stock at a
cost of approximately $65.8 million.
On August 2, 2011, the Board of Directors authorized a stock repurchase program. Under the
program, the Company was authorized to repurchase up to one million shares of our Class A common
stock. During the three months ended October 2, 2011, the Company repurchased the entire one
million shares at a cost of $27.2 million.
Financial Instruments
In the normal course of business, the Company manages risks associated with commodity prices,
foreign exchange rates and interest rates through a variety of strategies, including the use of hedging
transactions, executed in accordance with the Company’s policies. The Company’s hedging transactions
include, but are not limited to, the use of various derivative financial and commodity instruments. As a
matter of policy, the Company does not use derivative instruments unless there is an underlying
exposure. Any change in value of the derivative instruments would be substantially offset by an
67
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
opposite change in the value of the underlying hedged items. The Company does not use derivative
instruments for trading or speculative purposes.
Derivative instruments may be designated and accounted for as either a hedge of a recognized
asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For a fair
value hedge, both the effective and ineffective portions of the change in fair value of the derivative
instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes
attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair
value of the derivative instrument that are highly effective are deferred in accumulated other
comprehensive income or loss until the underlying hedged item is recognized in earnings. There were
no cash flow hedges as of December 31, 2013 or December 31, 2012.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated,
it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting
would be discontinued prospectively. If a forecasted transaction were no longer probable of occurring,
amounts previously deferred in accumulated other comprehensive income would be recognized
immediately in earnings. On occasion, the Company may enter into a derivative instrument that does
not qualify for hedge accounting because it is entered into to offset changes in the fair value of an
underlying transaction which is required to be recognized in earnings (natural hedge). These
instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value
recognized in earnings.
Foreign currency derivatives include forward foreign exchange contracts primarily for Canadian
dollars. Metal derivatives include commodity swaps for copper.
Portions of the Company’s outstanding debt are exposed to interest rate risks. The Company
monitors its interest rate exposures on an ongoing basis to maximize the overall effectiveness of its
interest rates.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. An entity is required to
maximize the use of observable inputs, where available, and minimize the use of unobservable inputs
when measuring fair value.
The Company has certain financial assets and liabilities that are measured at fair value on a
recurring basis and certain nonfinancial assets and liabilities that may be measured at fair value on a
nonrecurring basis. The fair value disclosures of these assets and liabilities are based on a three-level
hierarchy, which is defined as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities that the entity has
the ability to access at the measurement date.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active or other inputs that are
observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
68
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
Assets and liabilities subject to this hierarchy are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment and
considers factors specific to the asset or liability.
Shipping and Handling
Shipping and handling costs included in selling, general and administrative expense amounted to
$38.4 million, $37.0 million and $36.9 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
Research and Development
Research and development costs included in selling, general, and administrative expense amounted
to $21.5 million, $20.4 million and $20.5 million for the years ended December 31, 2013, 2012 and
2011, respectively.
Revenue Recognition
The Company recognizes revenue when all of the following criteria have been met: the Company
has entered into a binding agreement, the product has been shipped and title passes, the sales price to
the customer is fixed or is determinable, and collectability is reasonably assured. Provisions for
estimated returns and allowances are made at the time of sale, and are recorded as a reduction of sales
and included in the allowance for doubtful accounts in the Consolidated Balance Sheets. The Company
records provisions for sales incentives (primarily volume rebates), as an adjustment to net sales, at the
time of sale based on estimated purchase targets.
Basis of Presentation
Certain amounts in the 2012 and 2011 consolidated financial statements have been reclassified to
permit comparison with the 2013 presentation. These reclassifications had no effect on reported results
of operations or stockholders’ equity.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Standards
In July 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) 2013-11, ‘‘Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists’’ which is intended to eliminate
the diversity in practice in the presentation of unrecognized tax benefits in those instances. ASU
2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013, with early
adoption permitted. The adoption of this guidance is not expected to have a material impact on the
Company’s financial statements.
69
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Accounting Policies (Continued)
In March 2013, the FASB issued ASU No. 2013-05, ‘‘Parent’s Accounting for the Cumulative
Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a
Foreign Entity or of an Investment in a Foreign Entity.’’ This ASU is intended to eliminate diversity in
practice on the release of cumulative translation adjustment into net income when a parent either sells
a part or all of its investment in a foreign entity or no longer holds a controlling financial interest. In
addition, the amendments in this ASU resolve the diversity in practice for the treatment of business
combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign
entity. The provisions of this ASU are effective for interim and annual periods beginning after
December 15, 2013, with early adoption permitted, and must be applied prospectively. The Company
early adopted the ASU in 2013. The adoption of this guidance has not had a material impact on the
Company’s financial statements.
In February 2013, the FASB issued ASU 2013-02, ‘‘Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income’’ which requires additional disclosures about amounts
reclassified out of OCI by component, either on the face of the income statement or as a separate
footnote to the financial statements. ASU 2013-02 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2012. The adoption of this guidance has not had a
material impact on the Company’s financial statements.
(3) Discontinued Operations
On August 1, 2013, the Company completed the sale of all of the outstanding shares of an indirect
wholly-owned subsidiary, Watts Insulation GmbH (Austroflex), receiving net cash proceeds of
$7.9 million. Austroflex is an Austrian-based manufacturer of pre-insulated flexible pipe systems for
district heating, solar applications and under-floor radiant heating systems. Austroflex did not meet
performance expectations since its purchase approximately three years ago on June 28, 2010. The loss
after tax on disposal of the business was approximately $2.2 million. Further, during the year ended
December 31, 2011, the Company wrote down Austroflex’s long-lived assets by $14.8 million. The
Company will not have a substantial continuing involvement in Austroflex’s operations and cash flows,
and therefore Austroflex’s results of operations have been presented as discontinued operations for all
periods presented.
On December 21, 2012, the Company completed the sale of all of the outstanding shares of its
subsidiary, Flomatic Corporation (Flomatic). The sale excluded the backflow product line of Flomatic,
which was retained by the Company. Flomatic Corporation, located in Glens Falls, New York,
specializes in manufacturing and selling check valves, foot valves and automatic hydraulic control valves
for the well water industry. The Company acquired Flomatic as part of its acquisition of Socla in April
2011. The Company determined that it would not have a substantial continuing involvement in
Flomatic’s operations and cash flows, and therefore Flomatic’s results of operations have been
presented as discontinued operations for all periods presented.
In the first quarter of 2010, the Company recorded an estimated reserve of $5.3 million in
discontinued operations in connection with its investigation of potential violations of the Foreign
Corrupt Practices Act (FCPA) at Watts Valve (Changsha) Co., Ltd. (CWV), a former indirect wholly-
owned subsidiary of the Company in China. On October 13, 2011, the Company entered into a
settlement for $3.8 million with the Securities and Exchange Commission to resolve allegations
concerning potential violations of the FCPA at CWV. In connection with this matter, in 2012, the
Company received a $1.1 million payment from a service provider related to issues concerning a former
divested operation.
70
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(3) Discontinued Operations (Continued)
Condensed operating statements for discontinued operations are summarized below:
Operating income—FCPA matter (CWV) . . . . . . . . . . . . . . .
Operating income—Flomatic . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal—Flomatic . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (loss) income—Austroflex . . . . . . . . . . . . . . . . . .
Loss on disposal—Austroflex . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
(in millions)
$ — $ 1.1
—
1.3
— (3.8)
(0.2)
0.2
(2.2) —
0.3
—
$ 1.7
0.4
—
(16.9)
—
0.2
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . .
(2.4)
0.1
(0.9)
(1.1)
(14.6)
3.8
Loss from discontinued operations, net of taxes . . . . . . . . . .
$(2.3) $(2.0) $(10.8)
The Company did not recognize a tax benefit on the loss on the disposal of the Flomatic and
Austroflex shares, as the Company does not believe it is more likely than not that a tax benefit would
be realized.
Revenues reported in discontinued operations are as follows:
Years Ended
December 31,
2013
2012
2011
(in millions)
Flomatic revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Austroflex revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $12.9
9.5
18.2
$ 8.5
20.7
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.5
$31.1
$29.2
(4) Restructuring and Other Charges, Net
The Company’s Board of Directors approves all major restructuring programs that involve the
discontinuance of significant product lines or the shutdown of significant facilities. From time to time,
the Company takes additional restructuring actions, including involuntary terminations that are not part
of a major program. The Company accounts for these costs in the period that the individual employees
are notified or the liability is incurred. These costs are included in restructuring and other charges in
the Company’s consolidated statements of operations.
2013 Actions
On July 30, 2013, the Board of Directors authorized a restructuring program with respect to the
Company’s EMEA segment to reduce its European manufacturing footprint by approximately 10%,
improve organizational and operational efficiency and better align costs with expected revenues in
response to changing market conditions. The restructuring program is expected to include a pre-tax
charge to earnings totaling approximately $14.0 million, approximately $10.0 million of which is
expected to be recorded through fiscal 2014 and the remainder recorded during fiscal 2015. The total
charge will include costs for severance benefits, relocation, site clean-up, professional fees and certain
71
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other Charges, Net (Continued)
asset write-downs. The total net after-tax charge for the restructuring program is expected to be
approximately $10.0 million. The restructuring program is expected to be completed by the end of the
fourth quarter of fiscal 2015. Certain aspects of the restructuring program are subject to further
analysis and determinations by local management and consultation and negotiation with various
workers’ councils. The net after-tax charge incurred in fiscal 2013 was $2.9 million.
2011 Actions
In April 2011, the Board approved an integration program in association with the acquisition of
Socla. The program was designed to integrate certain operations and management structures of Socla
with a total estimated pre-tax cost of $6.4 million, with costs being incurred through 2012. The
Company revised its forecast to $4.2 million primarily to reflect reduced severance costs. The total net
after-tax charge was $2.8 million, with costs being fully incurred in 2012. As of December 31, 2013, the
restructuring reserve was zero.
2010 Actions
On February 8, 2010, the Board approved a restructuring program with respect to the Company’s
operating facilities in France. The restructuring program included the consolidation of five facilities into
two facilities. The program was originally expected to include pre-tax charges totaling approximately
$12.5 million, including costs for severance, relocation, site clean-up and certain asset write-downs.
Prior to 2013, the Company revised its forecast to $17.1 million primarily to reflect additional severance
and legal costs. In 2013, the Company recorded additional severance costs of $0.7 million for total costs
of $17.8 million. The 2010 restructuring program is substantially complete. As of December 31, 2013,
the restructuring reserve was 2.3 million and related to severance costs.
On September 13, 2010, the Board approved a restructuring program with respect to certain of the
Company’s operating facilities in the United States. The restructuring program included the shutdown
of two manufacturing facilities in North Carolina. Operations at these facilities have been consolidated
into the Company’s manufacturing facilities in New Hampshire, Missouri and other locations. The
program originally included pre-tax charges totaling approximately $4.9 million, including costs for
severance, shutdown costs and equipment write-downs and pre-tax training and pre-production set-up
costs of approximately $2.0 million. The Company revised its forecast to $2.5 million due to reduced
shutdown costs. The total net after-tax charge for this restructuring program was approximately
$1.5 million. The restructuring program was completed in 2012.
Other Actions
The Company also periodically initiates other actions which are not part of a major program. Total
‘‘Other Actions’’ pre-tax restructuring expense was $5.2 million, $3.5 million and $3.6 million in 2013,
2012 and 2011, respectively.
In 2013, the Company initiated restructuring activities with respect to the Company’s operating
facilities in EMEA, which included the relocation and closure of a manufacturing facility in Italy and
other relocation initiatives in Europe. In 2012, the Company initiated restructuring activities in North
America and Europe which continued into 2013. The restructuring activities in the Americas included
the relocation of certain production activities, which included the closure of a manufacturing site,
severance and shutdown costs in North America. The restructuring activities included costs for
72
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other Charges, Net (Continued)
severance, fixed asset impairment and shut-down costs. Additional expected pre-tax costs through 2015
are $0.4 million.
During 2011, the Company initiated several actions that were not part of a major program. In
September 2011, the Company announced a plan of termination that would result in a reduction of
approximately 10% of North American non-direct payroll costs. The Company recorded a charge of
$1.1 million for severance in connection with the plan during the year ended December 31, 2011. Also
in 2011, the Company initiated restructuring activities with respect to the Company’s operating facilities
in Europe, which included the closure of a facility. The Europe restructuring activities included pre-tax
costs of approximately $4.0 million, including costs for severance and shut-down costs. All costs were
incurred as of December 31, 2012.
During 2013, 2012 and 2011, the Company recorded a credit in restructuring and other charges,
net related to the reduction in the contingent liability for the anticipated earnout payment in
connection with the BRAE acquisition of $0.2 million, $1.0 million and $1.2 million, respectively.
A summary of the pre-tax cost by restructuring program is as follows:
Year Ended December 31,
2013
2012
2011
(in millions)
Restructuring costs:
2010 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.7
—
4.1
5.2
$ 0.6
1.1
—
3.5
Total restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment related to contingent liability reduction . . . . . . . .
10.0
(0.2)
5.2
(1.0)
Less: amount included in cost of goods sold . . . . . . . . . . . . .
(1.1) —
$ 3.3
3.1
—
3.6
10.0
(1.2)
—
Total restructuring and other charges, net . . . . . . . . . . . . . . .
$ 8.7
$ 4.2
$ 8.8
The Company recorded pre-tax restructuring charges in its business segments as follows:
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
(in millions)
$ 1.3
$1.3
8.7
3.9
— —
$ 1.2
8.6
0.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.0
$5.2
$10.0
73
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring and Other Charges, Net (Continued)
2013 Actions
Details of the Company’s 2013 European footprint program reserve, which for the year ended
December 31, 2013 only relates to severance, is as follows:
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net pre-tax restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . .
Utilization and foreign currency impact
. . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31, 2013
(in millions)
$ —
4.1
(2.1)
$ 2.0
The following table summarizes total expected, incurred and remaining pre-tax costs for
2013 European footprint program actions by type, and all attributable to the EMEA reportable
segment:
Expected costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs incurred—2013 . . . . . . . . . . . . . . . . . . . . .
Remaining costs at December 31, 2013 . . . . . . . . .
$12.3
(4.1)
$ 8.2
(in millions)
$0.2
—
$0.2
$1.3
—
$1.3
Severance
Legal and
consultancy
Asset
write-downs
Facility
exit
and other
$0.2
—
$0.2
Total
$14.0
(4.1)
$ 9.9
(5) Business Acquisitions and Disposition
tekmar
On January 31, 2012, the Company completed the acquisition of tekmar in a share purchase
transaction. A designer and manufacturer of control systems used in heating, ventilation, and air
conditioning applications, tekmar enhances the Company’s hydronic systems product offerings in the
U.S. and Canada and is part of the Americas segment. The initial purchase price paid was CAD
$18.0 million, with an earn-out based on future earnings levels being achieved. The initial purchase
price paid was equal to approximately $17.8 million based on the exchange rate of Canadian dollar to
U.S. dollars as of January 31, 2012. The total purchase price will not exceed CAD $26.2 million. Sales
for tekmar in 2011 approximated $11.0 million. The Company accounted for the transaction as a
business combination. The Company completed a purchase price allocation that resulted in the
recognition of $11.7 million in goodwill and $10.1 million in intangible assets. Intangible assets consist
primarily of acquired technology with an estimated life of 10 years, distributor relationships with an
estimated life of 7 years, and a trade name with an estimated life of 20 years. The goodwill is not
expected to be deductible for tax purposes. The results of tekmar are not material to the Company’s
consolidated financial statements. The results of operations for tekmar are included in the Company’s
Americas segment since acquisition date.
In 2012, a contingent liability of $5.1 million was recognized as the estimate of the acquisition date
fair value of the contingent consideration. A portion of the contingent consideration was paid out
during 2013, in the amount of $1.2 million, based on performance metrics achieved in 2012. The
contingent liability was increased by $1.0 million during the year ended 2013 based on performance
metrics achieved or expected to be achieved.
74
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(5) Business Acquisitions and Disposition (Continued)
Socla
On April 29, 2011, the Company completed the acquisition of Socla and the related water controls
business of certain other entities controlled by Danfoss A/S, in a share and asset purchase transaction.
The final consideration paid was euro 116.3 million. The purchase price was financed with cash on
hand and euro-based borrowings under our Prior Credit Agreement. The purchase price was equal to
approximately $172.4 million based on the exchange rate of euro to U.S. dollars as of April 29, 2011.
The Company accounted for the transaction as a business combination. The Company completed a
purchase price allocation that resulted in the recognition of $83.1 million in goodwill and $39.9 million
in intangible assets. Intangible assets consist primarily of customer relationships with estimated lives of
10 years and trade names with either 20 year lives or indefinite lives.
The consolidated statement of operations for the year ended December 31, 2011 includes the
results of Socla since the acquisition date and includes $94.8 million of revenues and $1.6 million of
operating income, which includes acquisition accounting charges of $4.7 million and restructuring
charges of $2.7 million.
TWVC
In March 2010, in connection with the Company’s manufacturing footprint consolidation, the
Company closed the operations of Tianjin Watts Valve Company Ltd. (TWVC) and relocated its
manufacturing to other facilities. On April 12, 2010, the Company signed a definitive equity transfer
agreement with a third party to sell the Company’s equity ownership and remaining assets of TWVC.
The sale was finalized in the fourth quarter of 2011. The Company received net proceeds of
approximately $6.1 million from the sale and recorded a receivable for the remaining proceeds. The
Company recognized a net pre-tax gain of $7.7 million and an after-tax gain of approximately
$11.4 million relating mainly to the recognition of a cumulative translation adjustment and a tax benefit
related to the reversal of a tax claw back in China. In 2013 and 2013, the Company recorded
adjustments to decrease the gain on disposal by $1.6 million and increase the gain on disposal by
$0.6 million, respectively.
(6) Inventories, net
Inventories consist of the following:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$111.3
19.1
179.8
$110.8
20.5
156.7
$310.2
$288.0
Raw materials, work-in-process and finished goods are net of valuation reserves of $29.9 million
and $27.7 million as of December 31, 2013 and 2012, respectively. Finished goods of $16.7 million and
$13.5 million as of December 31, 2013 and 2012, respectively, were consigned.
75
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(7) Property, Plant and Equipment
Property, plant and equipment consist of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$ 15.2
166.3
353.2
4.5
$ 15.8
156.4
322.5
15.5
539.2
(319.3)
510.2
(288.5)
$ 219.9
$ 221.7
(8) Income Taxes
The significant components of the Company’s deferred income tax liabilities and assets are as
follows:
December 31,
2013
2012
(in millions)
Deferred income tax liabilities:
Excess tax over book depreciation . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22.4
29.1
18.3
$ 23.7
30.5
15.7
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
69.8
69.9
Deferred income tax assets:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carry-forward . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension—accumulated other comprehensive income . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.3
10.9
12.3
16.3
9.8
16.7
5.4
8.6
15.8
14.9
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70.6
(13.1)
61.4
(10.1)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57.5
51.3
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(12.3) $(18.6)
76
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(8) Income Taxes (Continued)
The provision for income taxes from continuing operations is based on the following pre-tax
income:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2013
2012
2011
$21.6
66.2
$87.8
(in millions)
$ 27.3
72.9
$ 39.6
68.3
$100.2
$107.9
The provision for income taxes from continuing operations consists of the following:
Current tax expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
(in millions)
$12.8
19.7
2.5
35.0
$ 5.0
21.5
1.3
$ 6.9
18.3
1.8
27.8
27.0
(5.0)
(2.3)
(0.8)
(8.1)
4.4
(3.5)
1.1
2.0
5.5
(3.0)
1.2
3.7
$26.9
$29.8
$30.7
Actual income taxes reported from continuing operations are different than would have been
computed by applying the federal statutory tax rate to income from continuing operations before
income taxes. The reasons for this difference are as follows:
Years Ended
December 31,
2013
2012
2011
Computed expected federal income expense . . . . . . . . . . . . .
. . . . . . . . . . . .
State income taxes, net of federal tax benefit
Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . .
China tax clawback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
$35.0
1.5
(7.4)
$37.8
1.9
(4.4)
— (4.2)
(0.4)
0.7
$30.8
1.0
(5.7)
—
0.8
At December 31, 2013, the Company had foreign net operating loss carry forwards of $43.5 million
for income tax purposes before considering valuation allowances; $32.0 million of the losses can be
carried forward indefinitely and $11.5 million expire in 2020. The net operating losses consist of
$26.9
$29.8
$30.7
77
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(8) Income Taxes (Continued)
$29.8 million related to Austrian operations, $2.2 million to Italian operations, and $11.5 million to
Dutch operations.
At December 31, 2013 and December 31, 2012, the Company had valuation allowances of
$13.1 million and $10.1 million, respectively. At December 31, 2013, $6.1 million relates to U.S. capital
losses and $7.0 million relates to Austrian net operating losses. At December 31, 2012, the entire
$10.1 million related to U.S. capital losses. Management believes that the ability of the Company to use
such losses within the applicable carry forward period does not rise to the level of the more likely than
not threshold. The Company does not have a valuation allowance with respect to other deferred tax
assets, as management believes that it is more likely than not that the Company will recover such
deferred tax assets.
Changes enacted in income tax laws had no material effect on the Company in 2013, 2012 or 2011.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately
$397.2 million at December 31, 2013, $329.7 million at December 31, 2012, and $282.2 million at
December 31, 2011. Those earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been recorded thereon. Upon distribution of
those earnings, in the form of dividends or otherwise, the Company will be subject to withholding taxes
payable to the various foreign countries. Determination of the amount of U.S. income tax liability that
would be incurred is not practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits may be available to reduce some portion of any
U.S. income tax liability. Withholding taxes of approximately $11.3 million would be payable upon
remittance of all previously unremitted earnings at December 31, 2013.
(9) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
Commissions and sales incentives payable . . . . . . . . . . . . . . . . . . .
Product liability and workers’ compensation . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$ 40.5
33.5
56.6
4.6
$ 40.6
31.4
42.5
2.1
$135.2
$116.6
78
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(10) Financing Arrangements
Long-term debt consists of the following:
5.85% notes due April 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.47% notes due May 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.05% notes due June 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—consists primarily of European borrowings (at interest rates
ranging from 5.0% to 6.0%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Current Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$225.0
—
75.0
$225.0
75.0
75.0
7.7
307.7
2.2
9.6
384.6
77.1
$305.5
$307.5
Principal payments during each of the next five years and thereafter are due as follows (in
millions): 2014—$2.2; 2015—$2.3; 2016—$226.5; 2017—$1.7; 2018—$0.0, and thereafter—$75.0.
The Company maintains letters of credit that guarantee its performance or payment to third
parties in accordance with specified terms and conditions. Amounts outstanding were approximately
$23.6 million as of December 31, 2013 and $34.8 million as of December 31, 2012. The Company’s
letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign
purchases. The Company’s letters of credit generally expire within one year of issuance and are drawn
down against the revolving credit facility. These instruments may exist or expire without being drawn
down. Therefore, they do not necessarily represent future cash flow obligations.
On June 18, 2010, the Company entered into a note purchase agreement with certain institutional
investors (the 2010 Note Purchase Agreement). Pursuant to the 2010 Note Purchase Agreement, the
Company issued senior notes of $75.0 million in principal, due June 18, 2020. The Company will pay
interest on the outstanding balance of the Notes at the rate of 5.05% per annum, payable
semi-annually on June 18 and December 18 until the principal on the Notes shall become due and
payable. The Company may, at its option, upon notice, and subject to the terms of the 2010 Note
Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than $1 million
by paying the principal amount plus a make-whole amount (which is dependent upon the yield of
respective U.S. Treasury securities). The 2010 Note Purchase Agreement includes operational and
financial covenants, with which the Company is required to comply, including, among others,
maintenance of certain financial ratios and restrictions on additional indebtedness, liens and
dispositions. As of December 31, 2013, the Company was in compliance with all covenants related to
the 2010 Note Purchase Agreement.
On June 18, 2010, the Company entered into a credit agreement (the Prior Credit Agreement)
among the Company, certain subsidiaries of the Company who become borrowers under the Prior
Credit Agreement, Bank of America, N.A., as Administrative Agent, swing line lender and letter of
credit issuer, and the other lenders referred to therein. The Prior Credit Agreement provided for a
$300 million, five-year, senior unsecured revolving credit facility which could have been increased by an
additional $150 million under certain circumstances and subject to the terms of the Prior Credit
Agreement. The Prior Credit Agreement had a sublimit of up to $75.0 million in letters of credit.
Borrowings outstanding under the Prior Credit Agreement bore interest at a fluctuating rate per
annum equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate
79
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(10) Financing Arrangements (Continued)
plus an applicable percentage, ranging from 1.70% to 2.30%, determined by reference to the
Company’s consolidated leverage ratio plus, in the case of certain lenders, a mandatory cost calculated
in accordance with the terms of the Prior Credit Agreement, or (ii) in the case of base rate loans and
swing line loans, the highest of (a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for
such day as announced by Bank of America, N.A. as its ‘‘prime rate,’’ and (c) the British Bankers
Association LIBOR rate plus 1.0%, plus an applicable percentage, ranging from 0.70% to 1.30%,
determined by reference to the Company’s consolidated leverage ratio. In addition to paying interest
under the Prior Credit Agreement, the Company was also required to pay certain fees in connection
with the credit facility, including, but not limited to, a facility fee and letter of credit fees.
Under the Prior Credit Agreement, the Company was required to satisfy and maintain specified
financial ratios and other financial condition tests. As of December 31, 2013, the Company was in
compliance with all covenants related to the Prior Credit Agreement and had $276.4 million of unused
and available credit under the Prior Credit Agreement, $23.6 million of stand-by letters of credit
outstanding on the Prior Credit Agreement and no borrowings outstanding under the Prior Credit
Agreement.
On February 18, 2014, the Company terminated the Prior Credit Agreement and entered into a
new Credit Agreement (the New Credit Agreement) among the Company, certain subsidiaries of the
Company who become borrowers under the Credit Agreement, JPMorgan Chase Bank, N.A., as
Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other lenders referred to
therein. The New Credit Agreement provides for a $500 million, five-year, senior unsecured revolving
credit facility which may be increased by an additional $500 million under certain circumstances and
subject to the terms of the New Credit Agreement. The New Credit Agreement has a sublimit of up to
$100 million in letters of credit. Borrowings outstanding under the New Credit Agreement bear interest
at a fluctuating rate per annum equal to an applicable percentage equal to (i) in the case of
Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage,
ranging from 0.975% to 1.45%, determined by reference to the Company’s consolidated leverage ratio
plus, in the case of certain lenders, a mandatory cost calculated in accordance with the terms of the
New Credit Agreement, or (ii) in the case of base rate loans and swing line loans, the highest of
(a) the federal funds rate plus 0.5%, (b) the rate of interest in effect for such day as announced by
JPMorgan Chase Bank, N.A. as its ‘‘prime rate,’’ and (c) the British Bankers Association LIBOR rate
plus 1.0%, plus an applicable percentage, ranging from 0.00% to 0.45%, determined by reference to the
Company’s consolidated leverage ratio. In addition to paying interest under the New Credit Agreement,
the Company is also required to pay certain fees in connection with the credit facility, including, but
not limited to, an unused facility fee and letter of credit fees. The Credit Agreement matures on
February 18, 2019, subject to extension under certain circumstances and subject to the terms of the
New Credit Agreement. The Company may repay loans outstanding under the New Credit Agreement
from time to time without premium or penalty, other than customary breakage costs, if any, and subject
to the terms of the New Credit Agreement.
The New Credit Agreement imposes various restrictions on the Company and its subsidiaries,
including restrictions pertaining to: (i) the incurrence of additional indebtedness, (ii) limitations on
liens, (iii) making distributions, dividends and other payments, (iv) mergers, consolidations and
acquisitions, (v) dispositions of assets, (vi) the maintenance of minimum consolidated net worth, certain
consolidated leverage ratios and consolidated interest coverage ratios, (vii) transactions with affiliates,
(viii) changes to governing documents, and (ix) changes in control.
80
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(10) Financing Arrangements (Continued)
On April 27, 2006, the Company completed a private placement of $225.0 million of 5.85% senior
unsecured notes due April 2016 (the 2006 Note Purchase Agreement). The 2006 Note Purchase
Agreement includes operational and financial covenants, with which the Company is required to
comply, including, among others, maintenance of certain financial ratios and restrictions on additional
indebtedness, liens and dispositions. Events of default under the 2006 Note Purchase Agreement
include failure to comply with its financial and operational covenants, as well as bankruptcy and other
insolvency events. The Company may, at its option, upon notice to the note holders, prepay at any time
all or part of the Notes in an amount not less than $1.0 million by paying the principal amount plus a
make-whole amount, which is dependent upon the yield of respective U.S. Treasury securities. As of
December 31, 2013, the Company was in compliance with all covenants related to the 2006 Note
Purchase Agreement. The payment of interest on the senior unsecured notes is due semi-annually on
April 30th and October 30th of each year.
On May 15, 2003, the Company completed a private placement of $125.0 million of senior
unsecured notes consisting of $50.0 million principal amount of 4.87% senior notes due 2010 and
$75.0 million principal amount of 5.47% senior notes due May 2013. In May 2010, the Company repaid
$50.0 million in principal of 4.87% senior notes due upon maturity. The Company repaid the
$75.0 million of unsecured senior notes that matured on May 15, 2013 during the period ended
June 30, 2013 with available cash.
(11) Common Stock
The Class A common stock and Class B common stock have equal dividend and liquidation rights.
Each share of the Company’s Class A common stock is entitled to one vote on all matters submitted to
stockholders, and each share of Class B common stock is entitled to ten votes on all such matters.
Shares of Class B common stock are convertible into shares of Class A common stock, on a one-to-one
basis, at the option of the holder. As of December 31, 2013, the Company had reserved a total of
3,719,322 of Class A common stock for issuance under its stock-based compensation plans and
6,489,290 shares for conversion of Class B common stock to Class A common stock.
On April 30, 2013, the Board of Directors authorized the repurchase of up to $90 million of the
Company’s Class A common stock from time to time on the open market or in privately negotiated
transactions. The timing and number of any shares repurchased will be determined by the Company’s
management based on its evaluation of market conditions. Repurchases may also be made under a
Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be
precluded from doing so under insider trading laws. The repurchase program may be suspended or
discontinued at any time, subject to the terms of any Rule 10b5-1 plan the Company may enter into
with respect to the repurchase program. During 2013, the Company repurchased approximately 454,000
shares of Class A common stock at a cost of approximately $23.0 million.
On May 16, 2012, the Board of Directors authorized a stock repurchase program of up to two
million shares of the Company’s Class A common stock. The stock repurchase program was completed
in July 2012, as the Company repurchased the entire two million shares of Class A common stock at a
cost of approximately $65.8 million.
On August 2, 2011 the Board of Directors authorized a stock repurchase program. Under the
program, the Company was authorized to repurchase up to one million shares of our Class A common
stock. During the three months ended October 2, 2011, the Company repurchased the entire one
million shares at a cost of $27.2 million.
81
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Stock-Based Compensation
As of December 31, 2013, the Company maintains two stock incentive plans under which key
employees have been granted incentive stock options (ISOs) and nonqualified stock options (NSOs) to
purchase the Company’s Class A common stock. Only one plan, the Second Amended and Restated
2004 Stock Incentive Plan, is currently available for the grant of new stock options, which are currently
being granted only to employees. Under the 2004 Stock Incentive Plan, options become exercisable
over a four-year period at the rate of 25% per year and expire ten years after the grant date. ISOs and
NSOs granted under the plans may have exercise prices of not less than 100% of the fair market value
of the Class A common stock on the date of grant. The Company’s current practice is to grant all
options at fair market value on the grant date. At December 31, 2013, 1,650,400 shares of Class A
common stock were authorized for future grants of new equity awards under the Company’s 2004 Stock
Incentive Plan.
The Company grants shares of restricted stock and deferred shares to key employees and stock
awards to non-employee members of the Company’s Board of Directors under the 2004 Stock Incentive
Plan. Stock awards to non-employee members of the Company’s Board of Directors vest immediately,
and employees restricted stock awards and deferred shares vest over a three-year period at the rate of
one-third per year. The restricted stock awards and deferred shares are amortized to expense on a
straight-line basis over the vesting period.
The Company also has a Management Stock Purchase Plan that allows for the granting of
restricted stock units (RSUs) to key employees. On an annual basis, key employees may elect to receive
a portion of their annual incentive compensation in RSUs instead of cash. Each RSU provides the key
employee with the right to purchase a share of Class A common stock at 67% of the fair market value
on the date of grant. RSUs vest either annually over a three-year period from the grant date or upon
the third anniversary of the grant date and receipt of the shares underlying RSUs is deferred for a
minimum of three years or such greater number of years as is chosen by the employee. An aggregate of
2,000,000 shares of Class A common stock may be issued under the Management Stock Purchase Plan.
At December 31, 2013, 897,029 shares of Class A common stock were authorized for future grants
under the Company’s Management Stock Purchase Plan.
2004 Stock Incentive Plan
At December 31, 2013, total unrecognized compensation cost related to the unvested stock options
was approximately $10.6 million with a total weighted average remaining term of 2.9 years. For 2013,
2012 and 2011, the Company recognized compensation cost of $3.8 million, $2.1 million and
$1.6 million, respectively, in selling, general and administrative expenses. The Company recognized
additional stock compensation expense in 2012 of approximately $0.6 million in connection with the
modification of our former Chief Financial Officer’s options related to his retention agreement. The
Company recognized additional stock compensation expense in 2011 of approximately $2.2 million in
connection with the modification of the former Chief Executive Officer’s options related to his
separation agreement.
82
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Stock-Based Compensation (Continued)
The following is a summary of stock option activity and related information:
Years Ended December 31,
2013
2012
2011
Weighted Weighted
Average
Average
Exercise
Intrinsic
Price
Value Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Outstanding at beginning of year . . . . . . . . . . 1,064
379
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(53)
Cancelled/Forfeitures . . . . . . . . . . . . . . . . . .
(361)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33.37
54.78
36.97
31.73
(Options in thousands)
1,272
415
(33)
(590)
$30.43
37.67
31.18
30.19
1,303
295
(78)
(248)
$29.00
29.39
30.38
21.68
Outstanding at end of year . . . . . . . . . . . . . . 1,029
$41.66
$20.21
1,064
$33.37
1,272
$30.43
Exercisable at end of year . . . . . . . . . . . . . . .
249
$32.35
$29.52
360
$30.91
745
$30.61
As of December 31, 2013, the aggregate intrinsic value of exercisable options was approximately
$7.3 million, representing the total pre-tax intrinsic value, based on the Company’s closing Class A
common stock price of $61.87 as of December 31, 2013, which would have been received by the option
holders had all option holders exercised their options as of that date. The total intrinsic value of
options exercised for 2013, 2012 and 2011 was approximately $7.4 million, $5.7 million and $3.9 million,
respectively.
Upon exercise of options, the Company issues shares of Class A common stock.
The following table summarizes information about options outstanding at December 31, 2013:
Range of Exercise Prices
$26.34–$33.65 . . . . . . . .
$35.20–$35.70 . . . . . . . .
$37.41–$37.41 . . . . . . . .
$40.17–$57.95 . . . . . . . .
Options Outstanding
Options Exercisable
Number
Outstanding
Weighted Average
Remaining Contractual
Life (years)
Weighted Average
Exercise
Price
Number
Exercisable
Weighted Average
Exercise
Price
(Options in thousands)
305
10
301
413
1,029
3.97
3.80
6.05
7.93
6.17
$30.18
35.35
37.41
53.40
$41.66
174
10
55
10
249
$30.16
35.35
37.41
40.17
$32.35
The fair value of each option granted under the 2004 Stock Incentive Plan is estimated on the date
of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
6.0
6.0
6.0
40.3% 41.2% 40.9%
1.0% 1.2% 1.5%
1.7% 0.9% 1.6%
83
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Stock-Based Compensation (Continued)
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the
respective expected life of the option. The expected life (estimated period of time outstanding) of
options and volatility were calculated using historical data. The expected dividend yield of stock is the
Company’s best estimate of the expected future dividend yield. The Company applied an estimated
forfeiture rate of 6.75% for 2013, 2012 and 2011, for its stock options. This rate was calculated based
upon historical activity and is an estimate of granted shares not expected to vest. If actual forfeitures
differ from the expected rates, the Company may be required to make additional adjustments to
compensation expense in future periods.
The above assumptions were used to determine the weighted average grant-date fair value of stock
options of $20.30, $13.49 and $10.19 for the years ended December 31, 2013, 2012 and 2011,
respectively.
The following is a summary of unvested restricted stock and deferred shares activity and related
information:
Years Ended December 31,
2013
2012
2011
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
(Shares in thousands)
$35.45
54.80
37.44
35.25
$45.58
153
170
(8)
(78)
237
$30.33
37.62
30.66
30.61
$35.45
Weighted
Average
Grant Date
Fair Value
$31.39
29.51
31.12
30.94
$30.33
Shares
162
115
(14)
(110)
153
Shares
237
142
(16)
(103)
260
Unvested at beginning of year . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/Forfeitures . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested at end of year . . . . . . . . . . . . . .
The total fair value of shares vested during 2013, 2012 and 2011 was $5.6 million, $2.5 million and
$2.5 million, respectively. At December 31, 2013, total unrecognized compensation cost related to
unvested restricted stock and deferred shares was approximately $9.4 million with a total weighted
average remaining term of 2.1 years. For 2013, 2012 and 2011, the Company recognized compensation
costs of $5.1 million, $2.9 million and $2.4 million, respectively, in selling, general and administrative
expenses. The Company recognized additional stock compensation expense in 2012 of approximately
$0.2 million in connection with the modification of our former Chief Financial Officer’s restricted stock
awards related to his retention agreement. The Company recognized additional stock compensation
expense in 2011 related to restricted stock of approximately $0.8 million in connection with the
modification of the former Chief Executive Officer’s stock awards related to his separation agreement.
The Company applied an estimated forfeiture rate of 9.0% for 2013, 2012 and 2011, for restricted
stock and deferred shares issued to key employees. The aggregate intrinsic value of restricted stock and
deferred shares granted and outstanding approximated $16.1 million representing the total pre-tax
intrinsic value based on the Company’s closing Class A common stock price of $61.87 as of
December 31, 2013.
Management Stock Purchase Plan
Total unrecognized compensation cost related to unvested RSUs was approximately $0.8 million at
December 31, 2013 with a total weighted average remaining term of 1.4 years. For 2013, 2012 and 2011
84
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Stock-Based Compensation (Continued)
the Company recognized compensation cost of $0.7 million, $0.8 million and $1.3 million, respectively,
in selling, general and administrative expenses. Dividends declared for RSUs, that are paid to
individuals, that remain unpaid at December 31, 2013 total approximately $0.1 million.
A summary of the Company’s RSU activity and related information is shown in the following
table:
Years Ended December 31,
2013
2012
2011
Weighted Weighted
Average
Average
Purchase Intrinsic
RSUs
Price
Value
RSUs
Weighted
Average
Purchase
Price
RSUs
Weighted
Average
Purchase
Price
(RSU’s in thousands)
Outstanding at beginning of period . . . . . . . . . . . . 196
45
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14)
Cancelled/Forfeitures . . . . . . . . . . . . . . . . . . . . . .
(95)
Settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22.88
31.63
28.35
19.19
392 $18.74
64
(110)
(150)
361
99
(10)
(58)
$16.92
25.15
20.92
18.01
Outstanding at end of period . . . . . . . . . . . . . . . . 132
$27.46
$34.41
196 $22.88
392
$18.74
Vested at end of period . . . . . . . . . . . . . . . . . . . .
42
$25.30
$36.57
81 $20.36
157
$15.57
As of December 31, 2013, the aggregate intrinsic values of outstanding and vested RSUs were
approximately $4.5 million and $1.5 million, respectively, representing the total pre-tax intrinsic value,
based on the Company’s closing Class A common stock price of $61.87 as of December 31, 2013, which
would have been received by the RSUs holders had all RSUs settled as of that date. The total intrinsic
value of RSUs settled for 2013, 2012 and 2011 was approximately $2.8 million, $3.8 million and
$1.2 million, respectively. Upon settlement of RSUs, the Company issues shares of Class A common
stock.
The following table summarizes information about RSUs outstanding at December 31, 2013:
Range of Purchase Prices
$13.25–$19.87 . . . . . . . . . . . .
$25.15–$26.51 . . . . . . . . . . . .
$31.63–$31.63 . . . . . . . . . . . .
RSUs Outstanding
RSUs Vested
Number
Outstanding
Weighted Average
Purchase
Price
Number
Vested
Weighted Average
Purchase
Price
2
91
39
132
(RSUs in thousands)
2
40
—
$16.21
25.88
31.63
$27.46
42
$16.21
25.69
—
$25.30
85
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Stock-Based Compensation (Continued)
The fair value of each share issued under the Management Stock Purchase Plan is estimated on
the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average
assumptions:
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
3.0
3.0
3.0
34.1% 38.3% 44.9%
0.9% 1.1% 1.2%
0.4% 0.4% 1.2%
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the
respective expected life of the RSUs. The expected life (estimated period of time outstanding) of RSUs
and volatility were calculated using historical data. The expected dividend yield of stock is the
Company’s best estimate of the expected future dividend yield. The Company applied an estimated
forfeiture rate of 6.3% for 2013, 2012 and 2011, for its RSUs. This rate was calculated based upon
historical activity and are an estimate of granted shares not expected to vest. If actual forfeitures differ
from the expected rates, the Company may be required to make additional adjustments to
compensation expense in future periods.
The above assumptions were used to determine the weighted average grant-date fair value of
RSUs granted of $18.05, $15.68 and $16.25 during 2013, 2012 and 2011, respectively.
The Company distributed dividends of $0.50 per share for 2013, and $0.44 per share for 2012 and
2011, respectively, on the Company’s Class A common stock and Class B common stock.
(13) Employee Benefit Plans
The Company sponsors funded and unfunded non-contributing defined benefit pension plans that
together cover substantially all of its domestic employees. Benefits are based primarily on years of
service and employees’ compensation. The funding policy of the Company for these plans is to
contribute an annual amount that does not exceed the maximum amount that can be deducted for
federal income tax purposes.
On October 31, 2011, the Company’s Board of Directors voted to cease accruals effective
December 31, 2011 under both the Company’s Pension Plan and Supplemental Employees Retirement
Plan. The Company recorded a curtailment charge of approximately $1.5 million to write-off previously
unrecognized prior service costs and reduced the projected benefit obligation by $12.5 million. The
Board of Directors also voted to enhance the Company’s existing 401(k) Savings Plan.
86
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Employee Benefit Plans (Continued)
The funded status of the defined benefit plans and amounts recognized in the consolidated balance
sheets are as follows:
Change in projected benefit obligation
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$138.0
0.5
(0.8)
5.4
(12.5)
(4.3)
$121.2
0.6
(0.9)
5.7
15.6
(4.2)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$126.3
$138.0
Change in fair value of plan assets
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual (loss) gain on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$115.8
(7.7)
0.7
(0.8)
(4.3)
$108.4
11.8
0.7
(0.9)
(4.2)
Fair value of plan assets at end of the year . . . . . . . . . . . . . . . .
$103.7
$115.8
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (22.6) $ (22.2)
Amounts recognized in the consolidated balance sheets are as follows:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$ (0.6) $ (0.6)
(22.0)
(21.6)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(22.6) $(22.2)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42.2
$41.2
December 31,
2013
2012
(in millions)
87
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Employee Benefit Plans (Continued)
Information for pension plans with an accumulated benefit obligation in excess of plan assets are
as follows:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$126.3
$126.3
$103.7
$138.0
$138.0
$115.8
The components of net periodic benefit cost are as follows:
December 31,
2013
2012
(in millions)
Service cost—benefits earned . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs on benefits obligation . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost amortization . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss amortization . . . . . . . . . . . . . . . . . . . . . . .
Curtailment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2013
2012
2011
(in millions)
$ 0.6
5.7
(6.9)
—
0.6
—
$ 0.5
5.4
(6.8)
—
1.0
—
$ 5.3
6.0
(7.5)
0.3
2.7
1.5
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.1
$ — $ 8.3
For fiscal year 2014, the estimated net actuarial loss for the defined benefit pension plans that will
be amortized from accumulated other comprehensive income into net periodic benefit cost is
$1.1 million.
Assumptions:
Weighted-average assumptions used to determine benefit obligations:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.9% 4.0%
Weighted-average assumptions used to determine net periodic benefit costs:
December 31,
2013
2012
Years Ended December 31,
2013
2012
2011
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term rate of return on assets . . . . . . . . . . . . . . . .
4.0% 4.8% 5.50%/4.70%
6.0% 6.50%
7.75%
Discount rates are selected based upon rates of return at the measurement date utilizing a bond
matching approach to match the expected benefit cash flows. In selecting the expected long-term rate
of return on assets, the Company considers the average rate of earnings expected on the funds invested
or to be invested to provide for the benefits of this plan. This includes considering the trust’s asset
allocation and the expected returns likely to be earned over the life of the plan. This basis is consistent
88
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Employee Benefit Plans (Continued)
with the prior year. The original 2011 discount rate of 5.5% was revised to 4.70% at October 31, 2011,
the curtailment date of the plans.
Plan assets
The Company’s written Retirement Plan Investment Policy sets forth the investment policy,
objectives and constraints of the Watts Water Technologies, Inc. Pension Plan. This Retirement Plan
Investment Policy, set forth by the Pension Plan Committee, defines general investment principles and
directs investment management policy, addressing preservation of capital, risk aversion and adherence
to investment discipline. Investment managers are to make a reasonable effort to control risk and are
evaluated quarterly against commonly accepted benchmarks to ensure that the risk assumed is
commensurate with the given investment style and objectives.
The portfolio is designed to achieve a balanced return of current income and modest growth of
capital, while achieving returns in excess of the rate of inflation over the investment horizon in order to
preserve purchasing power of Plan assets. All Plan assets are required to be invested in liquid
securities. Derivative investments are not allowed.
Prohibited investments include, but are not limited to the following: futures contracts, private
placements, options, limited partnerships, venture-capital investments, interest-only (IO), principal-only
(PO), and residual tranche collateralized mortgage obligation (CMOs), and Watts Water
Technologies, Inc. stock.
Prohibited transactions include, but are not limited to the following: short selling and margin
transactions.
Allowable assets include: cash equivalents, fixed income securities, equity securities, mutual funds,
and guaranteed investment contracts.
Specific guidelines regarding allocation of assets are followed using a liability driven investment
(LDI) strategy. Under an LDI strategy, investments are made based on the expected cash flows
required to fund the pension plan’s liabilities. This cash flow matching technique requires a plan’s asset
allocation to be heavily weighted toward fixed income securities. The Company’s current allocation
target is 85% fixed income, 15% equities and other investments. With the plan curtailment, this
allocation target may increase to 90% or more in fixed income in the future. Investment performance is
monitored on a regular basis and investments are re-allocated to stay within specific guidelines. The
securities of any one company or government agency should not exceed 10% of the total fund, and no
more than 20% of the total fund should be invested in any one industry. Individual treasury securities
may represent 50% of the total fund, while the total allocation to treasury bonds and notes may
represent up to 100% of the Plan’s aggregate bond position.
The weighted average asset allocations by asset category are as follows:
Asset Category
December 31,
2013
2012
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.4% 9.6%
85.1
5.5
85.3
5.1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
89
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Employee Benefit Plans (Continued)
The following table presents the investments in the pension plan measured at fair value at
December 31, 2013 and 2012:
December 31, 2013
December 31, 2012
Level
1
Level Level
2
3
Total
Level
1
Level Level
2
3
Total
Money market funds . . . . . . . . . . . . . . . . . . . . . . $ 2.0 $ — $— $
Equity securities
(in millions)
2.0 $ 1.2 $ 0.3 $— $
1.5
U.S. equity securities(a) . . . . . . . . . . . . . . . . . .
Non-U.S. equity securities(a) . . . . . . . . . . . . . . .
Other equity securities(b) . . . . . . . . . . . . . . . . .
7.6 — —
1.3 — —
0.7 — —
7.6
1.3
0.7
8.3 — —
1.4 — —
1.3 — —
8.3
1.4
1.3
Debt securities
U.S. government . . . . . . . . . . . . . . . . . . . . . . . .
18.8 — — 18.8
U.S. and non-U.S. corporate(c) . . . . . . . . . . . . . — 70.9 — 70.9 — 79.0 — 79.0
5.5
Other investments(d) . . . . . . . . . . . . . . . . . . . . . .
16.5 — — 16.5
4.7 — —
1.1 —
4.7
4.4
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . $32.8 $70.9 $— $103.7 $35.4 $80.4 $— $115.8
(a) Includes investments in common stock from diverse industries
(b) Includes investments in index and exchange-traded funds
(c)
Includes investment grade bonds from diverse industries
(d) Includes investments in real estate investment funds, exchange-traded funds, commodity mutual
funds and accrued interest
Cash flows
The information related to the Company’s pension funds cash flow is as follows:
Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Company expects to contribute approximately $0.8 million in 2014.
Expected benefit payments to be paid by the pension plans are as follows:
During fiscal year ending December 31, 2014 . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2015 . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2016 . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2017 . . . . . . . . . . . . . . . . . . . .
During fiscal year ending December 31, 2018 . . . . . . . . . . . . . . . . . . . .
During fiscal years ending December 31, 2019 through December 31,
December 31,
2013
2012
(in millions)
$0.7
$0.7
$4.3
$4.2
(in millions)
$ 5.2
$ 5.5
$ 5.8
$ 6.1
$ 6.4
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37.3
90
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Employee Benefit Plans (Continued)
Additionally, all of the Company’s domestic employees are eligible to participate in the Company’s
401(k) savings plan. Effective January 1, 2012, the Company provides a base contribution of 2% of an
employee’s salary, regardless of whether the employee participates in the plan. Further, the Company
matches the contribution of up to 100% of the first 4% of an employee’s contribution. The Company’s
match contribution for the years ended December 31, 2013 and 2012 were $4.2 million and
$4.0 million, respectively. During 2011, the Company matched a specified percentage of employee
contributions, subject to certain limitations. The Company’s match contributions for the year ended
December 31, 2011 was $0.5 million. Charges for EMEA pension plans approximated $5.8 million,
$6.0 million and $6.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
These costs relate to plans administered by certain European subsidiaries, with benefits calculated
according to government requirements and paid out to employees upon retirement or change of
employment.
The Company entered into a Supplemental Compensation Agreement (the Agreement) with
Timothy P. Horne on September 1, 1996. Per the Agreement, upon ceasing to be an employee of the
Company, Mr. Horne must make himself available, as requested by the Board, to work a minimum of
300 but not more than 500 hours per year as a consultant in return for certain annual compensation as
long as he is physically able to do so. Mr. Horne retired effective December 31, 2002, and therefore the
Supplemental Compensation period began on January 1, 2003. If Mr. Horne complies with the
consulting provisions of the agreement above, he shall receive supplemental compensation on an annual
basis, subject to cost of living increases each year, in exchange for the services performed, as long as he
is physically able to do so. The payment for consulting services provided by Mr. Horne will be expensed
as incurred by the Company. During the years ended 2013, 2012 and 2011, Mr. Horne received
payments of $0.6 million, $0.6 million and $0.5 million, respectively. In the event of physical disability,
Mr. Horne will continue to receive this payment annually. In accordance with Generally Accepted
Accounting Principles (GAAP), the Company accrues for the future post-retirement disability benefits
over the period from January 1, 2003, to the time in which Mr. Horne becomes physically unable to
perform his consulting services (the period in which the disability benefits are earned). Mr. Horne is
still active as a consultant in accordance with the terms of the Agreement.
(14) Contingencies and Environmental Remediation
Accrual and Disclosure Policy
The Company is a defendant in numerous legal matters arising from its ordinary course of
operations, including those involving product liability, environmental matters and commercial disputes.
The Company reviews its lawsuits and other legal proceedings on an ongoing basis and follows
appropriate accounting guidance when making accrual and disclosure decisions. The Company
establishes accruals for matters when the Company assesses that it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated, net of any applicable insurance
proceeds. The Company does not establish accruals for such matters when the Company does not
believe both that it is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company’s assessment of whether a loss is probable is based on its
assessment of the ultimate outcome of the matter following all appeals.
Under the FASB issued ASC 450 ‘‘Contingencies’’, an event is ‘‘reasonably possible’’ if ‘‘the chance
of the future event or events occurring is more than remote but less than likely’’ and an event is
‘‘remote’’ if ‘‘the chance of the future event or events occurring is slight’’. Thus, references to the upper
91
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Contingencies and Environmental Remediation (Continued)
end of the range of reasonable possible loss for cases in which the Company is able to estimate a range
of reasonably possible loss mean the upper end of the range of loss for cases for which the Company
believes the risk of loss is more than slight.
There may continue to be exposure to loss in excess of any amount accrued. When it is possible to
estimate the reasonably possible loss or range of loss above the amount accrued for the matters
disclosed, that estimate is aggregated and disclosed. The Company records legal costs associated with
its legal contingencies as incurred, except for legal costs associated with product liability claims which
are included in the actuarial estimates used in determining the product liability accrual.
As of December 31, 2013, the Company estimates that the aggregate amount of reasonably
possible loss in excess of the amount accrued for its legal contingencies is approximately $11.2 million
pre-tax. With respect to the estimate of reasonably possible loss, management has estimated the upper
end of the range of reasonably possible loss based on (i) the amount of money damages claimed, where
applicable, (ii) the allegations and factual development to date, (iii) available defenses based on the
allegations, and/or (iv) other potentially liable parties. This estimate is based upon currently available
information and is subject to significant judgment and a variety of assumptions, and known and
unknown uncertainties. The matters underlying the estimate will change from time to time, and actual
results may vary significantly from the current estimate. In the event of an unfavorable outcome in one
or more of the matters described below, the ultimate liability may be in excess of amounts currently
accrued, if any, and may be material to the Company’s operating results or cash flows for a particular
quarterly or annual period. However, based on information currently known to it, management believes
that the ultimate outcome of all matters, as they are resolved over time, is not likely to have a material
adverse effect on the financial condition of the Company, though the outcome could be material to the
Company’s operating results for any particular period depending, in part, upon the operating results for
such period.
Trabakoolas et al., v, Watts Water Technologies, Inc., et al.,
On March 8, 2012, Watts Water Technologies, Inc., Watts Regulator Co., and Watts Plumbing
Technologies Co., Ltd., among other companies, were named as defendants in a putative nationwide
class action complaint filed in the U.S. District Court for the Northern District of California seeking to
recover damages and other relief based on the alleged failure of toilet connectors. The complaint seeks
among other items, damages in an unspecified amount, replacement costs, injunctive relief, and
attorneys’ fees and costs. No class certification hearing has been scheduled and the matter is currently
in the discovery phase. On August 22, 2013, the Court stayed the action for 45 days, to allow the
parties to explore the possibility of settlement. On October 8, 2013, this stay was extended until
November 7, 2013, in order to allow the parties additional time to explore settlement. On November 7,
2013, the Court extended the stay until December 12, 2013, in order to allow the parties additional
time to explore settlement.
On December 12, 2013, the Company reached an agreement in principle to settle all claims. The
total settlement amount is $23.0 million, of which the Company would be responsible for $14.0 million
after insurance proceeds of $9.0 million. The settlement was subject to review by the Court at a
preliminary approval hearing held on February 12, 2014. The Court granted preliminary approval on
February 14, 2014. The settlement is subject to final court approval after a fairness hearing currently
scheduled for July 16, 2014. Accordingly, there can be no assurance that the proposed settlement will
be approved in its current form. If the settlement is not approved, the Company intends to continue to
vigorously contest the allegations in this case.
92
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Contingencies and Environmental Remediation (Continued)
During the fourth quarter of 2013, the Company recorded a liability of $22.6 million related to the
Trabakoolas matter, of which $12.7 million was included in current liabilities and $9.9 million in other
noncurrent liabilities. In addition, a $9.0 million receivable was recorded in current assets related to
insurance proceeds due under a separate settlement agreement if the class action settlement is
approved.
Product Liability
The Company is subject to a variety of potential liabilities in connection with product liability
cases. The Company maintains product liability and other insurance coverage, which the Company
believes to be generally in accordance with industry practices. For product liability cases in the U.S.,
management establishes its product liability accrual, which includes legal costs associated with accrued
claims, by utilizing third-party actuarial valuations which incorporate historical trend factors and the
Company’s specific claims experience derived from loss reports provided by third-party administrators.
In other countries, the Company maintains insurance coverage with relatively high deductible payments,
as product liability claims tend to be smaller than those experienced in the U.S. Changes in the nature
of claims or the actual settlement amounts could affect the adequacy of this estimate and require
changes to the provisions. Because the liability is an estimate, the ultimate liability may be more or less
than reported.
Foreign Corrupt Practices Act Settlement
On October 13, 2011, the Company entered into a settlement with the SEC to resolve allegations
concerning potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) at Watts Valve
Changsha Co., Ltd., (CWV), a former indirect wholly-owned subsidiary of Watts Water in China. Under
the terms of the settlement, without admitting or denying the SEC’s allegations, the Company
consented to entry of an administrative cease-and-desist order under the books and records and
internal controls provisions of the FCPA. The Company also agreed to pay to the SEC $3.6 million in
disgorgement and prejudgment interest, and $0.2 million in penalties.
The amounts paid by us in connection with the settlement were fully accrued as of December 31,
2010. This settlement resolves all government investigations with respect to the Company concerning
CWV’s sales practices and potential FCPA violations.
Environmental Remediation
The Company has been named as a potentially responsible party with respect to a limited number
of identified contaminated sites. The levels of contamination vary significantly from site to site as do
the related levels of remediation efforts. Environmental liabilities are recorded based on the most
probable cost, if known, or on the estimated minimum cost of remediation. Accruals are not discounted
to their present value, unless the amount and timing of expenditures are fixed and reliably
determinable. The Company accrues estimated environmental liabilities based on assumptions, which
are subject to a number of factors and uncertainties. Circumstances that can affect the reliability and
precision of these estimates include identification of additional sites, environmental regulations, level of
clean-up required, technologies available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The Company recognizes changes
in estimates as new remediation requirements are defined or as new information becomes available.
93
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(14) Contingencies and Environmental Remediation (Continued)
Asbestos Litigation
The Company is defending 44 lawsuits in different jurisdictions, alleging injury or death as a result
of exposure to asbestos. The complaints in these cases typically name a large number of defendants and
do not identify any particular Company products as a source of asbestos exposure. To date, the
Company has obtained a dismissal in every case before it has reached trial because discovery has failed
to yield evidence of substantial exposure to any Company products.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course of operations, are also
pending or threatened against the Company.
(15) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, short-term investments, trade receivables and
trade payables approximate fair value because of the short maturity of these financial instruments.
The fair value of the Company’s 5.85% senior notes due 2016 and 5.05% senior notes due 2020 is
based on quoted market prices of similar notes (level 2). The fair value of the Company’s variable rate
debt approximates its carrying value. The carrying amount and the estimated fair market value of the
Company’s long-term debt, including the current portion, are as follows:
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$307.7
$333.4
$384.6
$420.8
Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis,
including foreign currency derivatives, deferred compensation plan assets and related liability. There
December 31,
2013
2012
(in millions)
94
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(15) Financial Instruments (Continued)
are no cash flow hedges as of December 31, 2013. The fair value of these certain financial assets and
liabilities were determined using the following inputs at December 31, 2013 and 2012:
Fair Value Measurements at December 31, 2013 Using:
Quoted Prices in Active
Markets for Identical
Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
(Level 1)
(Level 2)
(Level 3)
(in millions)
Assets
Plan asset for deferred compensation(1) . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Plan liability for deferred compensation(2) . .
Contingent consideration(2) . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . .
$4.6
$4.6
$4.6
4.4
$9.0
$4.6
$4.6
$4.6
—
$4.6
$—
$—
$—
—
$—
$ —
$ —
$ —
4.4
$4.4
Fair Value Measurements at December 31, 2012 Using:
Quoted Prices in Active
Markets for Identical
Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
(Level 1)
(Level 2)
(Level 3)
(in millions)
Assets
Plan asset for deferred compensation(1) . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Plan liability for deferred compensation(2) . .
Contingent consideration(2) . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . .
$4.2
$4.2
$4.2
5.2
$9.4
$4.2
$4.2
$4.2
—
$4.2
$—
$—
$—
—
$—
$ —
$ —
$ —
5.2
$5.2
(1) Included in other, net on the Company’s consolidated balance sheet.
(2) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.
The table below provides a summary of the changes in fair value of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for
the period December 31, 2012 to December 31, 2013.
Balance
December 31,
2012
Purchases,
sales,
settlements, net
Contingent consideration . . . . . .
$5.2
$(1.2)
Total realized and
unrealized (gains)
losses included in:
Net earnings
adjustments
Comprehensive
income
Balance
December 31,
2013
(in millions)
$0.8
$(0.4)
$4.4
95
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(15) Financial Instruments (Continued)
In 2010, a contingent liability of $1.9 million was recognized as an estimate of the acquisition date
fair value of the contingent consideration in the BRAE acquisition. This liability was classified as
Level 3 under the fair value hierarchy as it was based on the weighted probability of achievement of a
future performance metric as of the date of the acquisition, which was not observable in the market.
During the year ended December 31, 2011 and the year ended December 31, 2012, the estimate of the
fair value of the contingent consideration was reduced to $1.1 million and subsequently to $0.2 million,
based on the revised probability of achievement of the future performance metric. During the year
ended December 31, 2013, the remaining liability was reduced to zero.
In connection with the tekmar Control Systems acquisition in 2012, a contingent liability of
$5.1 million was recognized as the estimate of the acquisition date fair value of the contingent
consideration. This liability was classified as Level 3 under the fair value hierarchy as it was based on
the probability of achievement of a future performance metric as of the date of the acquisition, which
was not observable in the market. Failure to meet the performance metrics would reduce this liability
to zero; while complete achievement would increase this liability to the full remaining purchase price of
$8.2 million. A portion of the contingent consideration was paid out during 2013, in the amount of
$1.2 million, based on performance metrics achieved in 2012. The contingent liability was increased by
$1.0 million during the year ended 2013 based on performance metrics achieved to date.
Short-term investment securities as of December 31, 2012 consist of a certificate of deposit with a
remaining maturity of greater than three months at the date of purchase, for which the carrying
amount is a reasonable estimate of fair value.
Cash equivalents consist of instruments with remaining maturities of three months or less at the
date of purchase and consist primarily of certificates of deposit and money market funds, for which the
carrying amount is a reasonable estimate of fair value.
The Company uses financial instruments from time to time to enhance its ability to manage risk,
including foreign currency and commodity pricing exposures, which exist as part of its ongoing business
operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance
and to market risk related to changes in currency exchange rates and commodity prices. The Company
manages its exposure to counterparty credit risk through diversification of counterparties. The
Company’s counterparties in derivative transactions are substantial commercial banks with significant
experience using such derivative instruments. The impact of market risk on the fair value and cash
flows of the Company’s derivative instruments is monitored and the Company restricts the use of
derivative financial instruments to hedging activities. The Company does not enter into contracts for
trading purposes nor does the Company enter into any contracts for speculative purposes. The use of
derivative instruments is approved by senior management under written guidelines.
The Company has exposure to a number of foreign currency rates, including the Canadian dollar,
the euro, the Chinese yuan and the British pound. To manage this risk, the Company generally uses a
layering methodology whereby at the end of any quarter, the Company has generally entered into
forward exchange contracts which hedge approximately 50% of the projected intercompany purchase
transactions for the next twelve months. The Company primarily uses this strategy for the purchases
between Canada and the U.S. The average volume of contracts can vary but generally approximates
$1.0 to $10.0 million in open contracts at the end of any given quarter. At December 31, 2013, the
Company had contracts for notional amounts aggregating approximately $1.0 million. The Company
accounts for the forward exchange contracts as an economic hedge. Realized and unrealized gains and
losses on the contracts are recognized in other (income) expense in the consolidated statement of
96
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(15) Financial Instruments (Continued)
operations. These contracts do not subject the Company to significant market risk from exchange
movement because they offset gains and losses on the related foreign currency denominated
transactions. As of December 31, 2013 and 2012, the Company had no outstanding swaps.
The Company recorded income (loss) of approximately $0.1 million, $0.1 million and $0.6 million
in 2013, 2012 and 2011, respectively, to other expense (income), net in the consolidated statement of
operations from the impact of derivative instruments.
Leases
The Company leases certain manufacturing facilities, sales offices, warehouses, and equipment.
Generally, the leases carry renewal provisions and require the Company to pay maintenance costs.
Future minimum lease payments under capital leases and non-cancelable operating leases as of
December 31, 2013 are as follows:
Capital Leases Operating Leases
(in millions)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing interest (at rates ranging from 4.2% to 8.7%)
Present value of net minimum capital lease payments . . . . . . . . . . . . . .
Less current installments of obligations under capital leases . . . . . . . . . .
$ 1.6
1.6
1.6
1.5
1.4
2.8
$10.5
1.0
9.5
1.4
Obligations under capital leases, excluding current installments
. . . . .
$ 8.1
Carrying amounts of assets under capital lease include:
$ 9.1
6.3
3.6
2.2
1.0
6.4
$28.6
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(in millions)
$17.5
1.8
19.3
(5.1)
$14.2
$16.8
1.2
18.0
(3.9)
$14.1
(16) Segment Information
The Company operates in three geographic segments: Americas, EMEA, and Asia Pacific. Each of
these segments sells similar products, is managed separately and has separate financial results that are
reviewed by the Company’s chief operating decision-maker. All intercompany sales transactions have
been eliminated. Sales by region are based upon location of the entity recording the sale. The
accounting policies for each segment are the same as those described in the summary of significant
accounting policies (see Note 2).
97
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Segment Information (Continued)
The following is a summary of the Company’s significant accounts and balances by segment,
reconciled to its consolidated totals:
Net Sales
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 878.5
562.2
32.8
$ 835.0
565.6
26.8
$ 810.9
574.8
21.7
Consolidated net sales
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,473.5
$1,427.4
$1,407.4
Years Ended December 31,
2013
2012
2011
(in millions)
Operating income (loss)
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Subtotal reportable segments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate(*)
Consolidated operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net
90.4
46.9
9.7
147.0
(35.5)
111.5
0.6
(21.5)
(2.8)
$
96.5
52.5
6.5
155.5
(32.2)
123.3
0.7
(24.6)
0.8
$ 111.6
45.5
12.2
169.3
(35.8)
133.5
1.0
(25.8)
(0.8)
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
$
87.8
$ 100.2
$ 107.9
Identifiable assets (at end of period)
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 787.9
869.6
82.7
—
$ 810.9
802.1
84.3
11.7
$ 814.3
759.8
92.5
27.4
Consolidated identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,740.2
$1,709.0
$1,694.0
Property, plant and equipment, net (at end of period)
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
85.8
119.8
14.3
$
80.6
126.3
14.8
$
74.8
130.6
15.0
Consolidated long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 219.9
$ 221.7
$ 220.4
Capital Expenditures
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated capital expenditures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
18.0
8.5
1.2
27.7
20.5
26.0
2.4
48.9
$
$
$
$
17.9
10.7
1.9
30.5
19.6
26.8
2.1
48.5
$
$
$
$
8.3
13.5
0.7
22.5
18.7
27.2
2.0
47.9
*
Corporate expenses are primarily for administrative compensation expense, internal controls costs, professional fees, including
legal and audit expenses, shareholder services and benefit administration costs. These costs are not allocated to the geographic
segments as they are viewed as corporate functions that support all activities.
98
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16) Segment Information (Continued)
The following includes U.S. net sales and U.S. property, plant and equipment of the Company’s
Americas segment:
U.S. net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. property, plant and equipment, net (at end of
Years Ended December 31,
2013
2012
2011
$788.7
(in millions)
$747.4
$732.9
period) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 81.1
$ 75.1
$ 69.9
The following includes intersegment sales for Americas, EMEA and Asia Pacific:
Years Ended December 31,
2013
2012
2011
(in millions)
Intersegment Sales
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5.4
10.2
170.9
$
5.3
10.9
139.0
$
3.3
8.4
132.9
Intersegment sales . . . . . . . . . . . . . . . . . . . . . . .
$186.5
$155.2
$144.6
The Company sells its products into various end markets around the world and groups net sales to
third parties into four product categories. As a result of the EMEA transformation program, the
Company reallocated revenues of approximately $90.0 million and $100.0 million in 2012 and 2011,
respectively, from HVAC & gas to Residential & commercial flow control from what was previously
reported. The reallocation is based on the alignment of certain subsidiaries within these product
groupings. The adjustment to the disclosure has no effect on the consolidated financial statements. Net
sales to third parties for the four product categories are as follows:
Years Ended December 31,
2013
2012
2011
(in millions)
Net Sales
Residential & commercial flow control
. . . . . .
HVAC & gas . . . . . . . . . . . . . . . . . . . . . . . . .
Drains & water re-use . . . . . . . . . . . . . . . . . .
Water quality . . . . . . . . . . . . . . . . . . . . . . . . .
$ 907.7
348.8
140.0
77.0
$ 879.2
337.0
138.8
72.4
$ 854.9
347.0
135.3
70.2
Consolidated net sales . . . . . . . . . . . . . . . . .
$1,473.5
$1,427.4
$1,407.4
99
Watts Water Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(17) Quarterly Financial Information (unaudited)
Year ended December 31, 2013
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2012
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted
Income from continuing operations . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in millions, except per share information)
$358.9
128.9
16.3
16.1
$366.8
132.8
18.9
18.9
$371.8
133.9
17.5
15.4
$376.0
130.9
8.2
8.2
0.46
0.45
0.46
0.45
0.11
0.53
0.53
0.53
0.53
0.13
0.49
0.43
0.49
0.43
0.13
0.23
0.23
0.23
0.23
0.13
$357.6
127.8
15.7
15.7
$362.5
129.4
18.2
18.5
$352.8
127.7
18.3
18.7
$354.5
128.6
18.2
15.5
0.42
0.42
0.42
0.42
0.11
0.50
0.51
0.50
0.51
0.11
0.52
0.53
0.52
0.53
0.11
0.51
0.44
0.51
0.44
0.11
In the fourth quarter of 2013, the Company recorded legal costs related to the agreement in
principle to settle all claims in the Trabakoolas et al., v. Watts Water Technologies, Inc., et al., matter
pending in the United States District Court for the Northern District of California. The net settlement
expense recorded in income from continuing operations was $13.6 million. Please see Note 14 for
additional information. Also in the fourth quarter of 2013, the Company recorded customer rebate
expense of approximately $3.0 million that related to accrual adjustments for 2013.
(18) Subsequent Events
On January 9, 2014, David J. Coghlan resigned from his positions as Chief Executive Officer,
President and Director of the Company and our Board of Directors appointed Dean P. Freeman, our
Executive Vice President and Chief Financial Officer, to serve as interim Chief Executive Officer and
President of the Company. The Company’s Board of Directors has initiated a search for the Company’s
next Chief Executive Officer and President.
On February 18, 2014, the Company declared a quarterly dividend of thirteen cents ($0.13) per
share on each outstanding share of Class A common stock and Class B common stock.
100
Watts Water Technologies, Inc. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
(Amounts in millions)
For the Three Years Ended December 31:
Balance At
Beginning of
Period
Additions
Charged To
Expense
Additions
Charged To
Other Accounts
Deductions
Balance At
End of
Period
Year Ended December 31, 2011
Allowance for doubtful accounts . . . . . .
Reserve for excess and obsolete
$ 8.7
inventories . . . . . . . . . . . . . . . . . . . .
$23.5
Year Ended December 31, 2012
Allowance for doubtful accounts . . . . . .
Reserve for excess and obsolete
$ 8.9
inventories . . . . . . . . . . . . . . . . . . . .
$26.0
Year Ended December 31, 2013
Allowance for doubtful accounts . . . . . .
Reserve for excess and obsolete
$ 9.5
inventories . . . . . . . . . . . . . . . . . . . .
$26.8
1.1
6.1
1.2
6.6
1.2
8.1
0.3
1.3
1.0
0.4
0.2
0.3
(1.2)
$ 8.9
(4.9)
$26.0
(1.6)
$ 9.5
(6.2)
$26.8
(1.2)
$ 9.7
(7.3)
$27.9
101
Exhibit No.
EXHIBIT INDEX
Description
3.1
3.2
9.1
Restated Certificate of Incorporation, as amended(14)
Amended and Restated By-Laws(1)
The Amended and Restated George B. Horne Voting Trust Agreement—1997 dated as of
September 14, 1999(15)
10.1*
Supplemental Compensation Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne (9), Amendment No. 1, dated July 25, 2000 (16), and
Amendment No. 2 dated October 23, 2002(3)
10.2*
Form of Indemnification Agreement between the Registrant and certain directors and
officers of the Registrant(6)
10.3* Watts Water Technologies, Inc. Pension Plan (amended and restated effective as of
January 1, 2006) and First Amendment (17), Second Amendment, Third Amendment,
Fourth Amendment, Fifth Amendment and Sixth Amendment(11)
Registration Rights Agreement dated July 25, 1986(5)
10.4
10.5* Watts Water Technologies, Inc. Executive Incentive Bonus Plan(8)
10.6
Amended and Restated Stock Restriction Agreement dated October 30, 1991 (2), and
Amendment dated August 26, 1997(12)
10.7* Compromise Agreement among Watts UK Limited, Watts Industries Europe B.V., Watts
Water Technologies, Inc. and John Dennis Cawte(10)
10.8* Watts Water Technologies, Inc. Management Stock Purchase Plan Amended and Restated
as of July 30, 2013(10)
10.9* Watts Water Technologies, Inc. Second Amended and Restated 2004 Stock Incentive
Plan(8)
10.10* Non-Employee Director Compensation Arrangements(7)
10.11* Watts Water Technologies, Inc. Supplemental Employees Retirement Plan as Amended
and Restated Effective May 4, 2004, First Amendment and Second Amendment (17),
Third Amendment and Fourth Amendment(11)
10.12*
Form of Non-Qualified Stock Option Agreement under the Watts Water Technologies, Inc.
Second Amended and Restated 2004 Stock Incentive Plan(10)
10.13*
10.14*
Form of Restricted Stock Award Agreement for Employees under the Watts Water
Technologies, Inc. Second Amended and Restated 2004 Stock Incentive Plan(10)
Form of Deferred Stock Award Agreement under the Watts Water Technologies, Inc.
Second Amended and Restated 2004 Stock Incentive Plan(10)
10.15
Note Purchase Agreement, dated as of April 27, 2006, between the Registrant and the
10.16
10.17
10.18
Purchasers named in Schedule A thereto relating to the Registrant’s $225,000,000 5.85%
Senior Notes due April 30, 2016(4)
Form of 5.85% Senior Note due April 30, 2016(4)
Subsidiary Guaranty, dated as of April 27, 2006, in connection with the Registrant’s 5.85%
Senior Notes due April 30, 2016 executed by the subsidiary guarantors party thereto,
including the form of Joinder to Subsidiary Guaranty(4)
Credit Agreement, dated as of February 18, 2014, among the Registrant, certain
subsidiaries of the Registrant as Borrowers, JPMorgan Chase Bank N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders referred
to therein(19)
10.19
Guaranty, dated as of February 18, 2014, by the Registrant and the Subsidiaries of the
Registrant set forth therein, in favor of JPMorgan Chase Bank N.A. and other lenders
referred to therein(19)
10.18
Note Purchase Agreement, dates as of June 18, 2010, between the Registrant and
Purchasers named in Schedule A thereto relating to the Registrants $75,000,000 5.05%
Senior Notes due June 18, 2020(18)
10.19
Form of 5.05% Senior Note due June 18, 2020(18)
102
Exhibit No.
Description
10.20
Form of Subsidiary Guaranty in connection with the Registrants 5.05% Senior Notes due
June 18, 2020, including the form of Joinder to Subsidiary Guaranty(18)
10.21
Retention Agreement dated as of June 14, 2012 between the Registrant and William C.
McCartney(20)
11
21
23
31
32
Statement Regarding Computation of Earnings per Common Share(13)
Subsidiaries
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Certification of Principal Executive Officer and Principal Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to
18 U.S.C. Section 1350
101.INS** XBRL Instance Document.
101.SCH** XBRL Taxonomy Extension Schema Document.
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 29, 2013
(File No. 001-11499).
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 14,
1991 (File No. 001-11499).
(3) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 001-11499).
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 27, 2006
(File No. 001-11499).
(5) Incorporated by reference to the Registrant’s Form S-1 (No. 33-6515) as part of the Second
Amendment to such Form S-1 dated August 21, 1986.
(6) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 29, 2013 (File No. 001-11499).
(7) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2012 (File No. 001-11499).
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 15, 2013
(File No. 001-11499).
(9) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1996 (File No. 001-11499).
(10) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2013 (File No. 001-11499).
(11) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011 (File No. 001-11499).
(12) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1997 (File No. 001-11499).
(13) Incorporated by reference to notes to Consolidated Financial Statements, Note 2 of this Report.
(14) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended July 3, 2005 (File No. 001-11499).
103
(15) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for year ended
June 30, 1999 (File No. 001-11499).
(16) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for quarter ended
September 30, 2000 (File No. 001-11499).
(17) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-11499).
(18) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 18, 2010
(File No. 001-11499).
(19) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 24,
2014 (File No. 001-11499).
(20) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 14, 2012
(File No. 001-11499).
* Management contract or compensatory plan or arrangement.
** Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business
Reporting Language): (i) Consolidated Statements of Operations for the Years Ended
December 31, 2013, 2012 and 2011, (ii) Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2013, 2012 and 2011, (iii) Consolidated Balance Sheets at
December 31, 2013 and December 31, 2012, (iv) Consolidated Statements of Stockholders’ Equity
for the Years Ended December 31, 2013, 2012 and 2011, (v) Consolidated Statements of Cash
Flows for the Years Ended December 31, 2013, 2012 and 2011, and (vi) Notes to Consolidated
Financial Statements.
104
Improving comfort, safety, quality of lifeOur Mission:To improve comfort, safety, and quality of life for people around the world through our expertise in a wide range of water technologies. To be the best in the eyes of our associates, customers, and shareholders.Our MissionGlobalManagement TeamDean P. FreemanChief Executive Officer, President, andChief Financial OfficerRobert AllsopVice President of Operational ExcellenceKenneth R. LepageGeneral Counsel,Executive Vice President of Human Resources, and SecretaryElie MelhemPresident,Asia PacificRam RamakrishnanExecutive Vice President,Strategy and Business DevelopmentMario SanchezPresident and Group Managing Director,EMEASuellen TorregrosaPresident,AmericasDirectorsRobert L. AyersDirectorBernard BaertDirectorKennett F. BurnesDirectorRichard J. CathcartDirectorW. Craig KisselDirectorJohn K. McGillicuddyChairman of the Board and DirectorJoseph T. NoonanDirectorMerilee RainesDirectorCorporate InformationExecutive Offices815 Chestnut StreetNorth Andover, MA 01845-6098Tel: (978)688-1811Fax: (978)688-2976Registrar and Transfer AgentWells Fargo Shareowner ServicesP.O. Box 64854St. Paul, MN 55164-0854Tel: (800)468-9716AuditorsKPMG LLP99 High StreetBoston, MA 02110Stock ListingNew York Stock ExchangeTicker Symbol: WTSThis Annual Report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that relate to prospective events or developments are forward-looking statements. Also, words such as “intend,” “believe,” “anticipate,” “plan," “expect,” and similar expressions identify forward-looking statements. We cannot assure investors that our assumptions and expectations will prove to have been correct. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These factors include, but are not limited to, those set forth in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, included in this Annual Report. Except as required by law, we undertake no intention or obligation to update or revise any forward-looking state-ments, whether as a result of new information, future events, or otherwise.For additional information on Watts Water Technologies, Inc., visit our website at www.wattswater.com.For more information on Watts Water Technologies, visit our investor website by scanning the QR code below or visiting wattswater.com/investors.Printed on Recycled Paper40343ic.indd 13/11/14 10:40 AM Annual Report 1416
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